Dr. Nikhil Agarwal gives nine important tips for startups and scaleups who want to raise smart money from angel investors. Smart money is a combination of finance, mentorship, networking and know-how. According to him, an entrepreneur’s genius is to prepare a business plan that can convince angel investors to invest in his new business idea where the risk is higher.
He was a guest editor of the World Class Startup magazine’s special edition for the Global Fundraising Stage of the World Congress of Angel Investors, WBAF 2022. Angel Investor Review now shares his article with its subscribers online. Nikhil Agarwal is an Executive Investment Committee Member at the WBAF Angel Investment Fund, Senior Senator at the World Business Angels Investment Forum. He is the author of the bestselling book: The Startup Masterplan: How to Build Successful Business from Scratch.
The way Rome was not built in a day, the same analogy can be applied to startups. High-impact and profitable startups can take a few years or decades to be called successful. Funding is the lifeline for any startup to survive, especially in the initial years. During the initial phase, money from angels comes in handy – they are known as “angels” because they trust in the risky and unproven business venture for which the other funding sources, such as bank loans or venture funding, are not available.
An entrepreneur’s genius is to prepare a business plan that can convince angel investors to invest in his new business idea where the risk is higher. Here are the few things that an entrepreneur could do to raise smart finance from angels:
Find a problem that needs to be solved: No one wants to invest in an idea with no USP. Entrepreneurs should find a business problem that looks viable to be solved. Most businesses fail due to a lack of innovative ideas or the solution proposed by the startup is too familiar. E.g., Starting a new restaurant or setting a business to print t-shirts.
Prepare a business pitch that could be understood by a layman: Please know that the people who listen to your ideas (Angels or VCs) may not be technology experts. If you cannot explain your pitch to an Angel, how would you sell your product/service to customers? Think about it.
Show them that you have time, energy, and passion for building a business: Doing a startup is not a part-time occupation; the truth is it’s a double job, seven days a week. You have to demonstrate the ability, time, and passion for building a profitable business. Remember, Angels first invest in a Founder and their team; technology and idea come next.
Few of Robert’s classmates got into the business early in their careers, and they built a profitable business over the years. Robert is in a stable job, though he has the itch to start something independently. He decided to give it a shot – during the weekends, he works for his startup, and the rest of the week, he goes to his own office. After two years of working part-time on his startup, he was unable to find investments and build a high-quality product to be offered to his customers. On the other hand, he started to slip in his current job due to fatigue and lack of concentration. Now Robert wonders, what has gone wrong?
My advice to the entrepreneurs is to take a break from your job (if you are in full time job), have finances to support your home expenses and then dedicate yourself in building the business. You would be able to find more support from angels and customers once they see you working hard.
The total available market should be enough to excite them: Ultimately, the product /service offered by a startup should be able to find the customers. The addressable market should be large enough to excite the angels.
Liden Labs conceptualized the SecondLife ecosystem (an erstwhile avatar of metaverse) almost a decade back. SecondLife users were able to create cities, build businesses and transact using Liden Dollars (virtual currency tied to USD). Despite the initial hype, they could not find traction for their concept, hence fizzled out slowly. A decade later, today the cryptocurrency and metaverse are a big ticket business ideas.
Scalability of the business: None of the companies is successful without a solid customer base. Initial traction comes from the smaller customer segment. However, it’s the potential customer segment that attracts the angels. A startup that can scale up rapidly in the given market can raise capital with a reasonable valuation.
The solid team behind you: Many years back, I read a story in the newspaper about how a solid team transformed an aging steel company. At the end of the story, it was quoted as “Team Work …. Works”. I truly believe the quote that a solid team gives confidence to the angels and provides them a sense of security and trust in the ability of the startup to execute well. Startups should build a solid team base or have a concrete plan to build a team in their pitches.
Show them Customers and Sales: I remember a startup giving a pitch with just two slide presentations – slide 1 was the technology, and slide 2 was the customer/sales report. They were able to acquire over 10,000 paid customers within six months of the launch of the business. I understand that not every startup can show a large customer base or sales; however, there should be a clear strategy on how you would build a sales channel and acquire customers in your pitches.
ESG is the new hook for the investors: Today, ESG (Environment, Social and Governance) aspects, a.k.a sustainability aspects, are the latest hook for the investors. Investors are looking for a startup that cares about the environment and follows ESG fundamentals. Startups that are ESG compliant are likely to raise capital from established firms faster than the others.
Involve angels in your business as mentors or advisors: Mentorship is a critical part of your startup; you will need assistance at every level of growth. Finding a quality mentor and advisors should be done in the early stages of your startup. Structured mentorship will give new dimensions to your startup and provide confidence to the angels that you are in good hands.
The last tip is about communication. Angels are an intelligent lot of people who made money, and now they have the heart to put their hard-earned capital into your startup. Kindly remember that your startup is a risky game for them; it may succeed or fail. You have to give them confidence and provide them with a detailed strategy on how you would execute your plans to build your startup in terms of technology, find customers, and give exit to the investors. As Baybars Atluntas, Chairman of WBAF, always says, “Doing a startup is getting into a supercar, so fasten your seatbelts and get ready for the ride.” WS