After maxing out their own credit cards and borrowing from relatives, entrepreneurs often turn to angel investors for funding their new businesses.
Angels are not heavenly creatures but individuals who invest thousands of dollars of their own money in startups, often as part of a broader network. On the financing food chain they're a step below venture capitalists, who invest millions of dollars of institutional money in new businesses.
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"Thousands of people are out there pitching us, so understand what we're looking for," advises David S. Rose, who has funded over 90 startups and has written a new book, "Angel Investing: The Gust Guide to making Money & Having Fun Investing in Startups." (Gust is the international platform for startup financing that Rose founded).
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Rose visited The Daily Ticker, offering his tips on how to secure angel financing.
Tip #1: Make sure you have the ability to execute your plans.
Angel investors are "betting on the jockey, not the horse," says Rose. "We'll always take a class A entrepreneur with an okay business plan over a great business plan with a not-so-great entrepreneur." The lesson here: impress your potential founders.
Tip #2: Know your business and your market.
Angel investors "need to really understand every single thing about their business -- all of the costs that go in to it, all of the competition," says Rose. So do your homework: read the research and know all your metrics and numbers.
Tip #3: Do something that someone will pay for and prove it.
"We want a business that can really make money," says Rose. "We look for traction ... a company that has done something and has some proof that somebody is willing to write a check [for]." Online advertising-supported businesses no longer make that cut, says Rose.
Tip #4: Keep your investor pitch short and your elevator pitch shorter.
Investor pitches should be longer no than 15 minutes and elevator pitches no longer than 30 seconds -- which is roughly the time it takes to read the first two tips above. The elevator pitch is likely the first thing an investor hears so be brief and to the point. "The goal of that pitch: to get a second meeting," says Rose.
Tip #5: Understand the financing market.
Financing a new business today is drastically cheaper than it was in the last decade because of advanced technologies, says Rose. While that has created potentially many more investors for startups -- including angels and venture capitalists -- it has also meant more entrepreneurs seeking funding.
In addition to knowing what those funders are interested in, entrepreneurs need to be realistic about the valuations of their companies.
"Most angel investors typically invest tens of thousands of dollars," says Rose. "For us to get a meaningful stake in a company requires that the valuation be relatively low. We look for a big return over the long term because it's very risky."
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