There are several institutionalized start-up funding sources like venture capitalists and banks loans, but seldom these institutions fund early-stage start-ups. New entrepreneurs find it increasingly difficult to seed credit from the market, and therefore the concept of Angel Investment came into being. As an entrepreneur or businessman, it is pertinent that you identify the needs and wants of the customers and solve their problems. In the process of angel investment, the investors are your customers, who have certain expectations from your Business Model, your product, and even you as an entrepreneur. Below is the entire angel investment process, to prepare you to interact with angel investors, understand their process, and mold your business model according to their needs.
Different angel investors and networks have slightly different screening procedures, but the Angel- Startup fit is based on the following criteria –
- Industry Fit
- Growth Potential
- Low Risk or Strong Risk Mitigation Policies
- Product fit and market demand
Application and Internal Evaluation
Entrepreneurs looking for early investment can go through the websites of various angel networks or individual investors to check where they can send their application and in what format (link to TCA application page). Most angel networks will take online applications, and might prescribe a format, or a set of information they require. Here, an entrepreneur must submit their application or presentation, wherein the information is straight-forward, convincing, and genuine. Explain in simple terms what your product/service is and how it will sustain in the market. Also paint a picture of the market scenario, as most of the time, the investor looking at the application might not be an industry expert in your field.
It is pertinent to understand that Angel Investing is a high-risk high reward situation, hence the entrepreneur needs to ensure certain rewards for the investor for their risk. Present realistic goals and projections, based on the industry, market, and all the external factors that might influence your business i.e. their investment.
The screening committee receives several applications every week, which is the first filter for separating realistic, profitable start-up ideas and promising start-up ideas. This scouting process results in three responses, inviting the start-ups to present just based on their application, following up on some start-ups to learn more than just the application, and the last being passing a start-up if it does not fit the company goal. Investors mostly follow up with the start-up thy deem fit. Here, entrepreneurs learn from the investors and understand how they can make their business plan a better fit for the network. It is also a chance for the investors to know more about your company, beyond the numbers and projections. Interacting with the team and knocking your idea of your start-up may help you make an exceptional impression with the investors.
2. Deep Dive Evaluation
If an entrepreneur clears the screening process, usually the next step is a deep dive meeting to discuss the business model in detail. The Investor will research your industry, business model, management, operations, value proposition, etc. A detailed evaluation of the annual accounts of the firm, the balance sheet, income statement, cash flow statement will help the investor assess the potential in the start-up. Entrepreneurs should keep in mind that investors will invest in a start-up that might give them high returns and here, ROI becomes a key selection metric for the investors.
3. Investor Presentation
After a thorough analysis of your start-up, if the investors are impressed by what your company has to offer, you will be called for a pitch presentation. As an entrepreneur, be prepared, you must face the investors with a winning attitude and have your success metric already in place. Understand and project important metrics like recurring revenues, percentage addressable market, total demand, etc, to give a strong pitch presentation. Apart from your growth rate, return on investments, and revenue, you also need to convince the investors how you and your team can convert these projected numbers into reality. The Angel Investors are not only investing in your product or business model, but they are also investing in an entrepreneur who has strong leadership skills and exceptional decision making, backed up by a driven team working towards the end goal.
4. Term-sheet Execution
The term sheet is a bullet-point document entailing the terms and conditions of the deal. The execution of the term sheet governs the formulation of the final agreement. The terms sheet is likely to have a) the amount raised b) price per share c) pre-money valuation d) liquidation reference e) voting rights f) anti-dilution provisions and g) registration rights. After your presentation, the investors will start negotiating the terms of the deal. The term sheet is prepared and company valuation is negotiated.
5. Due Diligence
Due Diligence is the reasonable and comprehensive steps taken by an entrepreneur before entering a contract or agreement. A formal due diligence committee will look into the company records, prior deals, investors, any other contractual obligation, key suppliers, and customers, etc to understand your promised financial projections. Here, the entrepreneur must make sure they are not presenting false projections to the investors, and have realistic goals and profit valuations. It is an audit to review your performance in the previous years to make sure your start-up is the perfect fit for the investor.
6. Deal Closure
The due diligence is made into a report for the investor and the entrepreneur’s evaluation. Based on the report, the investor and the entrepreneur negotiate the term sheet and agree upon the final investment valuation. This is when the final contract is drawn and the deal is closed.
The Angel Investment process may seem daunting to new start-ups and young entrepreneurs. But this process can only be learned and polished through practice. While Angel Investors follow a strict procedure, their instinct, and their years of experience, guide them to select the right start-up. If you are looking for the right investment and the right mentorship for your business, the Chennai Angel is India’s most respected angel network. Dive into the ocean of finding the right investor and apply for funding now.