All of the following, not necessarily in the order found, must be included in your business plan in some regard. This information then needs to be condensed and added to your application through AngelSoft.
WHAT WE LOOK FOR
Management team: We look for teams of high-quality entrepreneurs with at least a few people with a track record of leadership and performance - either in the company’s specific industry or in prior entrepreneurial ventures. We also look at your team’s passion for and commitment to the new business idea, and your ability to inspire confidence among future stakeholders, including employees, potential customers, and investors. As we will be working together as partners, your team’s credibility is essential. In addition, your team must be open to and comfortable with receiving input provided by Angel investors.
Market opportunity: We invest in solutions that address major problems for significantly large target markets. Your company must demonstrate a strategy to claim significant share of this market. There are plenty of great business ideas - but not all businesses will generate returns that justify Angel investor and venture capital financing. Therefore, providing a solution to a problem with a large potential market is essential.
Profit potential: Can you demonstrate how high margins (+15%) and consistent cash flow growth will be achieved?
Capital needs: Do you require between $5,000 to $500,000 to finance growth activities, including product development, recruiting key staff, launching sales and marketing activity?
Financial projections: Have you developed reasonable financial projections - including an income statement, cash flow and balance sheet and supporting spreadsheets - based on logical, realistic assumptions?
Use of proceeds: Funds must be used to accelerate your company’s achievement of key milestones that increase the company’s value. We often fund activities that include research and product development, building sales and marketing infrastructure and hiring key executives.
Sales strategy: Do you have a plan to achieve widespread market penetration for your products and services? How will you do this as efficiently as possible? Will you create an internal, direct sales team, or will you rely on external channel partners?
Growth potential: We look for companies that can grow quickly and manage the scale necessary to succeed. Your company must demonstrate a plan to generate significant profits beyond the initial product idea. Do you have a strategy to achieve multiple sources of revenue? We also require well-conceived financial projections, based on sound assumptions, demonstrating consistent profits and cash flow growth.
Competitive advantage: Your company must have some proprietary features that distinguish you from potential competitors or provide barriers to entry that prevent other companies from capturing your customers with a similar offering. Attributes that convey competitive advantage include intellectual property protection, exclusive licenses, exclusive marketing and distribution relationships, strong brands, scarce human resources (i.e. knowledge and skills), and access to scarce raw materials.
Why do you want to use us? Our group members - all accredited individual investors - have significant executive experience in a variety of fields. One of the benefits of working with angel investors is the active coaching and contact network that such investors can provide. As such, there must be a fit between members of our group and your idea.
Technology: We prefer to invest in first-of-a-kind new ideas, rather than incremental enhancements to common products and services. Is this a nice-to-have, or a need-to-have product or service? However, we approach highly complex, esoteric technologies with caution. The concept behind the technology must be proven and verifiable. Further, we avoid science projects that don’t demonstrate a clear path to commercialization. Any breakthrough innovation must be accompanied by a strong business plan.
Have you proven the concept behind your product or technology? Can this be confirmed with data or by objective experts? Have you built a comprehensive business plan to commercialize the technology?
Have you protected your intellectual property? Have you performed an exhaustive search to be sure that you are not infringing on patents or trademarks held by others?
Valuation: Your valuation must fit within our risk/reward expectations for the investment. Typically, we look for pre-money valuations well below $1 million, from as little as $250K. It takes unusual situations (e.g., a company with existing revenues, issued patents and demonstrated growth) to get us to consider a pre-money valuation higher than $1 million. The following are different ways to consider this important aspect of your plan:
Full-dilution: In determining valuation we take into account the effect of all commitments to issue shares, which is called the fully-diluted number of shares. More specifically, the fully-diluted number of shares includes all shares that you would issue if all unconditional and contingent commitments to issue shares were to be given effect (e.g., exercise of options and warrants, conversion of preferred shares, exchange of debt for equity, etc.). Moreover, we expect a reasonable number of shares to be already reserved (and counted as part of full-dilution) for filling out the key management slots and for other employee stock options.
Pre-money valuation: The pre-money valuation, simply put, is the value you put on your company before getting the capital you seek. To compute: multiply the fully-diluted shares immediately prior to the proposed financing (e.g., 2 million fully-diluted shares) by the price/share of the proposed financing (e.g., $1/share) to yield the pre-money valuation ($2 million, in this example). If you add the proposed financing amount (e.g., $500K) to the pre-money valuation you get the post-money valuation ($2.5 million in this example).
Pre-money valuation based on percent of company: Some entrepreneurs are more used to thinking in terms of offering some percent (e.g., 20%) of their company for some amount (e.g., $200K) of financing. Numerically, divide the proposed financing ($200K) by the offered percentage (20%) to get the post-money valuation ($1 million), and subtract the money ($200K) from the post-money ($1 million) to get the pre-money valuation ($800k). Note that these are just two different ways to compute the valuation; and hence, as expected, yield the identical results.
Investment value vs. company valuation: It is important to keep in mind that early stage investors will likely have their equity interest in your company diluted (made smaller) by later investors. For example, if angel group members invest $500,000 at a pre-money valuation of $1 million (and thus end up owning 33% of the company), and then a venture capital firm invests $5 million the following year at $5 million pre-money valuation, the original angel group investors will now own only half as much of the company, even though the company value has increased more than three-fold. As a result, because of the early stage at which we invest, you should know that angel group members generally receive 20-40% of the company’s fully diluted equity in exchange for their investment.
Exit strategy: Angel investors typically seek returns of at least ten times their initial investment, within eight years. This level of return on investment is essential due to the high risk and likelihood of failure among early stage ventures. Thus, a clearly articulated exit strategy - how angel investors will extract such returns - is essential. For example, do you plan to sell the company to an established corporation in your industry? Or will your exit be through subsequent rounds of financing - venture capital or the public markets? Angel investors are not just interested in the strategy you select, but more importantly in the how - the operational strategy that shows specific steps you will take to achieve the exit.
WHAT WE LOOK FOR
Management team: We look for teams of high-quality entrepreneurs with at least a few people with a track record of leadership and performance - either in the company’s specific industry or in prior entrepreneurial ventures. We also look at your team’s passion for and commitment to the new business idea, and your ability to inspire confidence among future stakeholders, including employees, potential customers, and investors. As we will be working together as partners, your team’s credibility is essential. In addition, your team must be open to and comfortable with receiving input provided by Angel investors.
Market opportunity: We invest in solutions that address major problems for significantly large target markets. Your company must demonstrate a strategy to claim significant share of this market. There are plenty of great business ideas - but not all businesses will generate returns that justify Angel investor and venture capital financing. Therefore, providing a solution to a problem with a large potential market is essential.
Profit potential: Can you demonstrate how high margins (+15%) and consistent cash flow growth will be achieved?
Capital needs: Do you require between $5,000 to $500,000 to finance growth activities, including product development, recruiting key staff, launching sales and marketing activity?
Financial projections: Have you developed reasonable financial projections - including an income statement, cash flow and balance sheet and supporting spreadsheets - based on logical, realistic assumptions?
Use of proceeds: Funds must be used to accelerate your company’s achievement of key milestones that increase the company’s value. We often fund activities that include research and product development, building sales and marketing infrastructure and hiring key executives.
Sales strategy: Do you have a plan to achieve widespread market penetration for your products and services? How will you do this as efficiently as possible? Will you create an internal, direct sales team, or will you rely on external channel partners?
Growth potential: We look for companies that can grow quickly and manage the scale necessary to succeed. Your company must demonstrate a plan to generate significant profits beyond the initial product idea. Do you have a strategy to achieve multiple sources of revenue? We also require well-conceived financial projections, based on sound assumptions, demonstrating consistent profits and cash flow growth.
Competitive advantage: Your company must have some proprietary features that distinguish you from potential competitors or provide barriers to entry that prevent other companies from capturing your customers with a similar offering. Attributes that convey competitive advantage include intellectual property protection, exclusive licenses, exclusive marketing and distribution relationships, strong brands, scarce human resources (i.e. knowledge and skills), and access to scarce raw materials.
Why do you want to use us? Our group members - all accredited individual investors - have significant executive experience in a variety of fields. One of the benefits of working with angel investors is the active coaching and contact network that such investors can provide. As such, there must be a fit between members of our group and your idea.
Technology: We prefer to invest in first-of-a-kind new ideas, rather than incremental enhancements to common products and services. Is this a nice-to-have, or a need-to-have product or service? However, we approach highly complex, esoteric technologies with caution. The concept behind the technology must be proven and verifiable. Further, we avoid science projects that don’t demonstrate a clear path to commercialization. Any breakthrough innovation must be accompanied by a strong business plan.
Have you proven the concept behind your product or technology? Can this be confirmed with data or by objective experts? Have you built a comprehensive business plan to commercialize the technology?
Have you protected your intellectual property? Have you performed an exhaustive search to be sure that you are not infringing on patents or trademarks held by others?
Valuation: Your valuation must fit within our risk/reward expectations for the investment. Typically, we look for pre-money valuations well below $1 million, from as little as $250K. It takes unusual situations (e.g., a company with existing revenues, issued patents and demonstrated growth) to get us to consider a pre-money valuation higher than $1 million. The following are different ways to consider this important aspect of your plan:
Full-dilution: In determining valuation we take into account the effect of all commitments to issue shares, which is called the fully-diluted number of shares. More specifically, the fully-diluted number of shares includes all shares that you would issue if all unconditional and contingent commitments to issue shares were to be given effect (e.g., exercise of options and warrants, conversion of preferred shares, exchange of debt for equity, etc.). Moreover, we expect a reasonable number of shares to be already reserved (and counted as part of full-dilution) for filling out the key management slots and for other employee stock options.
Pre-money valuation: The pre-money valuation, simply put, is the value you put on your company before getting the capital you seek. To compute: multiply the fully-diluted shares immediately prior to the proposed financing (e.g., 2 million fully-diluted shares) by the price/share of the proposed financing (e.g., $1/share) to yield the pre-money valuation ($2 million, in this example). If you add the proposed financing amount (e.g., $500K) to the pre-money valuation you get the post-money valuation ($2.5 million in this example).
Pre-money valuation based on percent of company: Some entrepreneurs are more used to thinking in terms of offering some percent (e.g., 20%) of their company for some amount (e.g., $200K) of financing. Numerically, divide the proposed financing ($200K) by the offered percentage (20%) to get the post-money valuation ($1 million), and subtract the money ($200K) from the post-money ($1 million) to get the pre-money valuation ($800k). Note that these are just two different ways to compute the valuation; and hence, as expected, yield the identical results.
Investment value vs. company valuation: It is important to keep in mind that early stage investors will likely have their equity interest in your company diluted (made smaller) by later investors. For example, if angel group members invest $500,000 at a pre-money valuation of $1 million (and thus end up owning 33% of the company), and then a venture capital firm invests $5 million the following year at $5 million pre-money valuation, the original angel group investors will now own only half as much of the company, even though the company value has increased more than three-fold. As a result, because of the early stage at which we invest, you should know that angel group members generally receive 20-40% of the company’s fully diluted equity in exchange for their investment.
Exit strategy: Angel investors typically seek returns of at least ten times their initial investment, within eight years. This level of return on investment is essential due to the high risk and likelihood of failure among early stage ventures. Thus, a clearly articulated exit strategy - how angel investors will extract such returns - is essential. For example, do you plan to sell the company to an established corporation in your industry? Or will your exit be through subsequent rounds of financing - venture capital or the public markets? Angel investors are not just interested in the strategy you select, but more importantly in the how - the operational strategy that shows specific steps you will take to achieve the exit.
