Building Your Idea Through Angel Investing

posted on 09/23/08 at 08:00:00 pm by Joel Ross

At the last GR Tech Lunch, we had Bill Klevin as our guest speaker. Bill runs DaVinci Capital, a small company in Grand Rapids focused on helping entrepreneurs secure funding to build their business. He mainly deals with Angel investors, particularly the Grand Angels. Well, at least until October, when he's moving to Wyoming and DaVinci will be closing their doors.

We had a pretty good turn out, and Bill did a great job of capturing everyone's attention in the room - so much so that he didn't get an opportunity to even eat his lunch. We kept him there for the majority of the hour and a half, and he did a great job explaining the process you'd go through and answering everyone's questions.

He laid out three things that are key to have before you even consider getting angel funding:

  • Solid management and domain expertise: When you're looking for angel funding, the most common reason is that your company isn't able to get traditional bank funding. You don't have historical company performance to go on. When you talk to angel investors, you're essentially selling yourself and your team. Being able to demonstrate that you have the right people in place will go a long way with investors.
  • 3 or 4 reference customers: The investors you talk to are going to be smart - they didn't get money by having no business sense. For the most part, they'll be able to tell if you have a realistic business plan or if you're just pretending. But there's one group who can tell if you have a solid business better than the investors can: customers. If customers are willing to pay money for what you're providing - especially a customer worth referencing - then you're much better off.
  • An exit strategy: This was one of the things I found most interesting. Angel investors will usually get less than 50% stake in the company - meaning that they will not have a majority interest, and thus, won't have a majority vote in the direction of the company. So before they put their money in your hands, they want to ensure that you're going to give them an out. Most angel investors are looking for a 3-5 year commitment, and then they want out. So what does out mean? Well, you have the option to buy them out, but that's not really easy to do - you want to put that money back into the company, not in investors' hands. Bank loan? Same situation. A bank won't give you money that's not going to be reinvested into the company. That doesn't make sense for them. Going public? Sure, that's an option, but highly unlikely to actually happen. So what are angel investors looking for? Well, they want to know who you're going to sell to! Ok, so not exactly who you will sell to, but they want an idea of the possibilities, because that's their best out.

Then he talked about the process to actually get in front of Angel investors, and what will happen after you get funding. There's a lot of up-front work to ensure that your business plan is solid, that you have good documentation of your company and it's predicted growth, and that you have a solid plan for how you will use the money. That process will take 6-8 weeks. Then you get in front of the investors for your presentation - where you get 15-20 minutes to pitch your idea. Then they'll either send you packing, or do further investigation.

Having gone through the process, I found one particular detail interesting that I didn't realize before: you wouldn't get funding from the group - it would be from just a handful of people that found your idea to be interesting. And in a lot of cases, you might end up getting funding from multiple angel investment groups. If you're looking for $1,500,000, you might get $50,000 from a few people, $100,000 from a few more, and it will slowly add up until you get the amount you need. That process usually takes another 6-8 weeks, so you're looking at about 3-4 months from the time you start to the time you have money. And once you have the money, you'll also put together a Board, where you'll update your investors on the current status, as well as have a sounding board to give you advice when you need it. The Board will usually consist of four or five people, so it probably won't include all of your investors. The good part of that is that you can lean on board members to give you advice and/or contacts when you need them.

Anyway, the lunch and information was great. I really enjoyed listening to Bill talk, and will be sad to see him leave the area. If you're in the Grand Rapids area, you should definitely come out for the next one! First Monday of every month.

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