[Disclaimer - To make this post more credible, I would like you to believe that I have successfully raised an angel round but so far it hasn't happened. In my defense, it's only been two weeks since I have started and so I bit of an amateur myself. Nonetheless, since there are so few accounts, I think I should share my learnings]
Raising angel money is tough. Even though e-commerce is supposed to be a hot sector, the ecosystem around equity investing is growing and VCs have no shortage of funds, but sadly none of these things change the ground reality. Entrepreneurs still have tough time convincing angels and raising their first round in our country.
1. Oh angels, why don't you blog?
So how do you find angels? Well there are not many angels active in our country. Of the few who are active are difficult to find and the ones that are easily traceable are usually bombarded with large number of requests (good and bad) so they have fairly tight doors (usually need references). For whatever reasons, most angels do not maintain an active online presence in India and are therefore so difficult to find. There is little information to guide founders as they struggle to find the right investor. Even though there may be no shortage of HNI's but many of those do not understand the complexities of an ecommerce business model and hence cannot be considered to be good angels.
[On a side note, one of the reasons why most great startups originate in silicon valley is because of a fairly evolved ecosystem of mentors and easy access to risk capital]
2. Where are the successful entrepreneurs?
Angel investing is tough, risky and probably not as glamorous as VC or PE. A lot of hard work and sweat goes on to make a startup ready for an angel or VC round. Even then majority of investments do not turn out to be a success. The best of investors fail more than they succeed. This probably might be one of the reasons why its not written much about in popular media. Specially in a country like ours where many consider failure as a social stigma and it is still difficult to accept. More startup launches are reported than failures all over the world but perhaps this ratio is particularly skewed in our country.
The best learning therefore comes from entrepreneurs who've gone through similar experiences in their recent past. So startup forums and conferences are sometimes good to attend. It helps you connect with new people and allows you to extend your network of wisdom and share your learnings.
3. Still searching for your rich uncle?
They say the best way to raise early money is through family, friends and fools. As long as you can convince one of these guys to become the lead investor, the others are easy to follow. So why not take some from your cash rich uncle or family business friend? By all means you should explore that option and there are founders who have also made it work but its still a risky bet. What are the chances of them understanding the risks and returns of your business model (if one exists at the time you raise money)? Even if you think they do, your relations can go sour pretty quickly if things are not going according to schedule. You may find the next trench of money not hitting your bank account. In an ideal world, you want someone who can bring in more to the table than just money in your business. So keep all those factors in mind.
4. How much to raise?
This is probably a most difficult and important question to answer. If you ask too much, the chances of getting it reduce exponentially with your ticket size. If you ask too less, you may not be able to meet the milestone required to meet the next round of funding. Even if you do, you may discover VCs now want you to achieve more than what you initially thought - expand to one more city, add more category, increase number of transactions, prove more traction etc.
5. Do we need a buffer?
Unless you can see the future, you definitely should keep a buffer. But a buffer is not required in all cost projections. Certain costs are trivial (such as office rents, equipment etc) and do not require a buffer. Depending on your nature of business, there will be some critical components in your costs (such as marketing costs, employee costs etc) that are more sensitive to working or not working of your business. You must raise more than your projections (say 20%) on these cost heads. I think most investors understand it as long as you can talk about your assumptions.
6. Scalability & Defensibility
Things that every investor will ask you about your business model. Some will buy your arguments, other won't. But it is important keep taking their feedback at end of every call and refining your answers before the next investor. Because at the end of the day these are subjective arguments and different people (even investors) will have different takes on feasibility of your model.
7. Are we too small?
Here's the advise a successful entrepreneur turned angel gave me and the one what I'd like to believe.
You're never too small for an angel round. Some entrepreneurs raise angel money on presentations and even before they start. You can only be too big for an angel round but never too small for it.
Although it sounds very encouraging, I've also spoken to angels who've said quite the opposite - you are too small at the moment and need more traction before we can look at your business. I guess what they are trying to say is that they are not very sure of success of your business or the time you've taken to achieve that success. They may need to see more virality or kick ass recommendations that can comfort them beyond doubt (or at least reduce their doubt) that investing in your business is good bet for them.
8. Finding a lead investor
Most angels I spoke to say they invest in groups with other well known angels. That reduces their risk and increases the number of people in your network. It is difficult to find an investment where only 1 or 2 major players own the entire investment. So in a way, your search for an angel investor actually boils down to finding the first lead angel, who will say that I'm willing to put my personal money into your venture and will then probably help you connect with other players with solid backing.
Nothing works in your pitch as a simple statement that says that you already have access to some committed capital from another well known angel (and not your uncle) and are looking for some more money to complete the round.
9. What else makes it easy?
Certain additional factors (apart from traction) give more comfort to an angel and increase your likelihood of investing. So if it makes sense for your business, get them in place.
- Do you have a co-founder or strong full time dedicated team in place?
- Do you have a strong technical or operational background and if possible a good college degree?
- How strong are your communication and selling skills?
- Did you have a venture before this one? (even if earlier one didn't work, its fine. Shows that you're long term player and committed to making it work someday)
- Are you in the same city as the lead investor? (some investors prefer it, makes management easy)
- How much cash you've burned till date? (this can work both ways, if you've burned 10 lakhs of your own and are asking for another 50, it becomes sligh easy sell but on the other hand if you've burned too much and still only got this far, this can be a negative point as well)
- How much time you've spent on reaching this particular amount of traction? (usually startups older than 2-3 years might have tougher times)
10. Do startup revenues and projections matter?
Fortunately not so much in silicon valley but unfortunately more so in India. It is difficult to convince angels to invest money purely on account of traction you have or will achieve by end of year 1. Not having a strong business model or revenue making stream is not likely to motivate them much. Other operational metrics LTVC (lifetime value of customer), number of users base, repeat transaction rate, virality etc also play an important role but nothing works as good as strong revenues in initial months.
Finally, remember it's not about convincing naysayers, it's about finding believers!
Angel investing is in a way more about selling a vision and your team. It should ideally be less about projections and having a perfect business model in place. If you have right ingredients and overall direction, you will figure out things along the way.
Therefore knocking on more doors in this case might be better than sticking to a few ones. Because not all angels will buy your story. They will have questions which you won't have convincing answers. But there may be some angels who will get excited about the overall opportunity. So you need to talk to more and more people. However, if initial signals are giving you a common feedback, then it might be better to take a pause, fill those gaps and then approach the new ones.
Here's a inspiring short inspiring short article on how Linked in went through raising its Series A.
http://bit.ly/mPRgX0
Good luck!
Raising angel money is tough. Even though e-commerce is supposed to be a hot sector, the ecosystem around equity investing is growing and VCs have no shortage of funds, but sadly none of these things change the ground reality. Entrepreneurs still have tough time convincing angels and raising their first round in our country.
1. Oh angels, why don't you blog?
So how do you find angels? Well there are not many angels active in our country. Of the few who are active are difficult to find and the ones that are easily traceable are usually bombarded with large number of requests (good and bad) so they have fairly tight doors (usually need references). For whatever reasons, most angels do not maintain an active online presence in India and are therefore so difficult to find. There is little information to guide founders as they struggle to find the right investor. Even though there may be no shortage of HNI's but many of those do not understand the complexities of an ecommerce business model and hence cannot be considered to be good angels.
[On a side note, one of the reasons why most great startups originate in silicon valley is because of a fairly evolved ecosystem of mentors and easy access to risk capital]
2. Where are the successful entrepreneurs?
Angel investing is tough, risky and probably not as glamorous as VC or PE. A lot of hard work and sweat goes on to make a startup ready for an angel or VC round. Even then majority of investments do not turn out to be a success. The best of investors fail more than they succeed. This probably might be one of the reasons why its not written much about in popular media. Specially in a country like ours where many consider failure as a social stigma and it is still difficult to accept. More startup launches are reported than failures all over the world but perhaps this ratio is particularly skewed in our country.
The best learning therefore comes from entrepreneurs who've gone through similar experiences in their recent past. So startup forums and conferences are sometimes good to attend. It helps you connect with new people and allows you to extend your network of wisdom and share your learnings.
3. Still searching for your rich uncle?
They say the best way to raise early money is through family, friends and fools. As long as you can convince one of these guys to become the lead investor, the others are easy to follow. So why not take some from your cash rich uncle or family business friend? By all means you should explore that option and there are founders who have also made it work but its still a risky bet. What are the chances of them understanding the risks and returns of your business model (if one exists at the time you raise money)? Even if you think they do, your relations can go sour pretty quickly if things are not going according to schedule. You may find the next trench of money not hitting your bank account. In an ideal world, you want someone who can bring in more to the table than just money in your business. So keep all those factors in mind.
4. How much to raise?
This is probably a most difficult and important question to answer. If you ask too much, the chances of getting it reduce exponentially with your ticket size. If you ask too less, you may not be able to meet the milestone required to meet the next round of funding. Even if you do, you may discover VCs now want you to achieve more than what you initially thought - expand to one more city, add more category, increase number of transactions, prove more traction etc.
5. Do we need a buffer?
Unless you can see the future, you definitely should keep a buffer. But a buffer is not required in all cost projections. Certain costs are trivial (such as office rents, equipment etc) and do not require a buffer. Depending on your nature of business, there will be some critical components in your costs (such as marketing costs, employee costs etc) that are more sensitive to working or not working of your business. You must raise more than your projections (say 20%) on these cost heads. I think most investors understand it as long as you can talk about your assumptions.
6. Scalability & Defensibility
Things that every investor will ask you about your business model. Some will buy your arguments, other won't. But it is important keep taking their feedback at end of every call and refining your answers before the next investor. Because at the end of the day these are subjective arguments and different people (even investors) will have different takes on feasibility of your model.
7. Are we too small?
Here's the advise a successful entrepreneur turned angel gave me and the one what I'd like to believe.
You're never too small for an angel round. Some entrepreneurs raise angel money on presentations and even before they start. You can only be too big for an angel round but never too small for it.
Although it sounds very encouraging, I've also spoken to angels who've said quite the opposite - you are too small at the moment and need more traction before we can look at your business. I guess what they are trying to say is that they are not very sure of success of your business or the time you've taken to achieve that success. They may need to see more virality or kick ass recommendations that can comfort them beyond doubt (or at least reduce their doubt) that investing in your business is good bet for them.
8. Finding a lead investor
Most angels I spoke to say they invest in groups with other well known angels. That reduces their risk and increases the number of people in your network. It is difficult to find an investment where only 1 or 2 major players own the entire investment. So in a way, your search for an angel investor actually boils down to finding the first lead angel, who will say that I'm willing to put my personal money into your venture and will then probably help you connect with other players with solid backing.
Nothing works in your pitch as a simple statement that says that you already have access to some committed capital from another well known angel (and not your uncle) and are looking for some more money to complete the round.
9. What else makes it easy?
Certain additional factors (apart from traction) give more comfort to an angel and increase your likelihood of investing. So if it makes sense for your business, get them in place.
- Do you have a co-founder or strong full time dedicated team in place?
- Do you have a strong technical or operational background and if possible a good college degree?
- How strong are your communication and selling skills?
- Did you have a venture before this one? (even if earlier one didn't work, its fine. Shows that you're long term player and committed to making it work someday)
- Are you in the same city as the lead investor? (some investors prefer it, makes management easy)
- How much cash you've burned till date? (this can work both ways, if you've burned 10 lakhs of your own and are asking for another 50, it becomes sligh easy sell but on the other hand if you've burned too much and still only got this far, this can be a negative point as well)
- How much time you've spent on reaching this particular amount of traction? (usually startups older than 2-3 years might have tougher times)
10. Do startup revenues and projections matter?
Fortunately not so much in silicon valley but unfortunately more so in India. It is difficult to convince angels to invest money purely on account of traction you have or will achieve by end of year 1. Not having a strong business model or revenue making stream is not likely to motivate them much. Other operational metrics LTVC (lifetime value of customer), number of users base, repeat transaction rate, virality etc also play an important role but nothing works as good as strong revenues in initial months.
Finally, remember it's not about convincing naysayers, it's about finding believers!
Angel investing is in a way more about selling a vision and your team. It should ideally be less about projections and having a perfect business model in place. If you have right ingredients and overall direction, you will figure out things along the way.
Therefore knocking on more doors in this case might be better than sticking to a few ones. Because not all angels will buy your story. They will have questions which you won't have convincing answers. But there may be some angels who will get excited about the overall opportunity. So you need to talk to more and more people. However, if initial signals are giving you a common feedback, then it might be better to take a pause, fill those gaps and then approach the new ones.
Here's a inspiring short inspiring short article on how Linked in went through raising its Series A.
http://bit.ly/mPRgX0
Good luck!
