According to a report by the Angel Capital Education Foundation (ACEF) the angel investment process is typically comprised of 4 steps. According to the ACEF report only between 1 and 4% of entrepreneurs that apply for angel investment funding will make it through the entire 4 stage process. That means that if you really want to stand a chance at securing angel investment you need to understand each of the 4 stages in detail. The 4 steps are as follows:
Stage 1 – Executive Summary – Typically the first stage of the angel investment process, also known as pre-screening, is simply an executive summary round. You will start by sending in your 2 page executive summary. This round determines whether or not you will have the opportunity to meet with your potential investors face-to-face. According to the ACEF, only 25% of applicants will make it through this round, so do not take round 1 lightly. Famous venture capitalist Guy Kawasaki said in his book, The Art of the Start, “Of the effort you put into write a business plan, 80 percent should go into the executive summary. These are the most important paragraphs of your organization’s existence.”
Stage 2 – Investor Presentation – If you are lucky enough to make it to the second round you will typically have the opportunity to meet with your potential investors. You will be asked to prepare a short presentation, after which, the investor group will have an opportunity to grill you with questions. Going back to Guy Kawasaki again, make sure to follow his 10/20/30 rule. “A PowerPoint presentation should have ten slides, last no more than twenty minutes, and contain no font smaller than thirty points.” About 1 out of 3 will make it to the next round.
Stage 3 – Due Diligence – This is the third and probably most intense round. At this point the investors are going to want to know everything there is to know about you and your business. Be prepared to answer lots of questions and provide the potential investors with a detailed business plan. You might feel like you are applying for a position in the CIA because the investors will want to dig deep into your personal and professional background. If you have nothing to hide then this round should be a breeze. Only about 1 in 3 entrepreneurs will make it out of this round alive to move on to the final round.
Stage 4 – Investment – Congratulations you made it to the final round. Now you have about a 50/50 shot at receiving funding. You will probably be asked to come back in for a final investment presentation in front of the entire angel investor network. Sounds terrifying. If you are well prepared this round should be a breeze. The potential investors clearly have an interest in your business because they have brought you this far. Now this is your chance to get them to buy in to your vision. Even more important than selling your vision, you need to show them how they will make piles of money.
This 4 round process is intimidating to most entrepreneurs, and for 96 to 99% of business owners it ends in failure. If you get turned down once, don’t let that get you down. There are literally hundreds of thousands of angel investors across the country and you just might be able to find the one that will help you take your vision and make it a reality.
To learn more about Adam Hoeksema visit him at TheExecutivePlan.Com or connect with him on Twitter. Be sure to download Adam’s Free 11 Page Report – “How to Write a Powerful Executive Summary”!
About the Author, Adam Hoeksema
Thanks for the tips. I thought about looking for investment for a start up a while ago. I never actually did – partly because I wasn’t really sure about how to go about it. But now I have a much clearer idea of the process.
alex johnson recently posted..ebay affiliate
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Alex,
If you do start to engage in the process of raising capital for a startup make sure to let me know. I would love to talk with you about it. I know Scott at BizPlanIt would be able to provide you with a wealth of information as well. It is not an easy process, but I have seen clients successfully raise capital, and boy is it exciting.
Adam Hoeksema recently posted..Top 20 Questions to Ask Before Submitting an Executive Summary to Angel Investors
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May I also suggest a quick blog or paragraph on what to expect in terms, of well.. terms. A term sheet can be very confusing to entrepreneurs who are not well versed in raising capital. Angel rounds, and especially seed capital rounds for early stage, should be thought of as the most rewarding round for angels. Entrepreneurs can help get more angels involved in this round of funding by giving the best terms to the investors. My angel investors receive a .10 share buy-in of exchangeable shares in the seed round. They get a board seat for each group, and they are put on the same vesting schedule as the principals. This is how it should be.
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Thank you for giving this brief overview of the four stages of review for angel investors. You provided some helpful tips and Guy Kawasaki is always a good resource.
I recently read an article or interview with Richard Branson about risk and one useful tip for some investors is making a “splash” in a given industry. Make your presentation unique and original.
Until the whole world hears,
Rafael
Rafael Cantu recently posted..How to increase Lead Generation for your Small Business – Part 1
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Very informative. My business is sourcing products and services in China and I am often contacted by people who are looking for an Angle Investor and do not have a clue how to proceed. I will consider you a resource and point them to your blog.
Gary Young China Sourcing recently posted..Links for 2010-11-05 delicious
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