Faster angel and VC funding
The above is a well-reviewed book on how to get angel financing. It’s one of the few good books on the subject so I recommend it. This post is a shorter overview to get you started.
In a recent post entitled “How to shorten the time to funding” I reviewed the major attributes of companies that succeed in getting funded by angels and VC’s that fund early stage companies. Is it really working?
In other words, if you put all the right stuff together, will you get the funding?
To answer this question, let’s look at what’s going on at Tech Coast Angels, the angel group to which I belong. 31 companies were funded by Tech Coast Angels in 2010. So far this year, 7 companies have been funded and 10 others are closing soon.
Let me give you a few examples from this year without breaching confidentiality:
One angel-funded company invented software that reduces power requirements significantly in non-Windows based systems such as smart phones, tablets and many servers. Anyone with a smart phone knows how compelling this problem is.
Here’s a summary of how they qualified for funding:
Market
- Large total available market (TAM) – at least $100M a year? - Yes
- Is the market growing? – Yes
- Is the problem compelling? – Yes
Product
- Solution unique and/or disruptive? – Yes
- Solution compelling? - Maybe (there are other coming ways to solve the problem)
- Does the product exist (at least in prototype or proof-of-concept form)? Yes
- Is the market validation believable? – Yes (product is on the market)
Market plan
- Go-to-market plan believable (within ability of team and funding)? – Yes
- Company could dominate its niche? - Yes
Competitive advantage
- Advantage over competition? – Significant
- Is advantage sustainable (with barriers to entry)? – Yes (patents)
- Does company own proprietary technology (intellectual property)? – Yes (patents)
Financials
- Revenue projections large enough? — Yes (over $15,000,000 by end of year 5)
- Pre-money valuation reasonable? - Yes (about $2,000,000)
- Is “use of funds” reasonable, without high salaries? – yes
Exit
- Is likely exit valuation enough to generate at least 10X return for investors?- Yes
- Exit likely within 3 to 5 years? – Yes
- Pathway to exit is clear? – Yes
- Additional funds needed to exit are reasonable? – Yes
Team
- Does the team have domain experience? – Yes
- Team has strength in both business management and technology vision? – Yes
- Is the CEO qualified to be CEO with business management skills? – Yes
- Leadership team is coachable? — Yes
- Team has working relationships with angels on the board and as advisors? – Yes
- Is the founder and the CEO seeking funding for the right reason – i.e. to build a company rather than have a comfortable job for themselves? – Yes
In balance, this was an excellent candidate. The only questionable point was how compelling is this particular solution to the power problem in non-windows systems? There are several other possible solutions. But the strength of the other factors and the perceived ability of the management team to stay ahead of the curve carried the day. The company received the funding it needed.
OK, so this is how one company was evaluated. In future posts, I’ll use the same checklist to demonstrate how other companies were evaluated.
What do you do with this? If you are an entrepreneur seeking funding, I suggest you use the above checklist before presenting to angel and VC investors. If the answer is no or moderate on any item, then there must be compensating aspects. For example:
If the exit is not likely within 3 to 5 years, then the exit valuation must be large enough and all other aspects strong enough to enable a home run exit in 7 to 10 years. Some investors will tolerate (even prefer) the long wait to get a home run.
If the CEO is the technical visionary founder rather than a business manager, this is tolerable if he/she is open to finding the right CEO and the opportunity is large and compelling enough to attract a powerful effective CEO to join the team.
If the company does not own propietary technology, this is tolerable if there are other effective barriers to entry (such as exclusive alliances already in place) and the team’s ability to execute the plan is believable.
Some aspects in this checklist are non-negotiable for most angels and VC’s:
- Is the leadership team coachable?
- Does the team have domain expertise?
- Does the product exist, at least in prototype or proof-of-concept form?
- Is there believable market validation?
I just can’t think of any company that has received angel or venture capital funding without these four elements.
The exception are companies that receive “seed funding” (a few hundred thousand dollars or less), which is available from Tech Coast Angels and several VC firms.
==> Here’s a suggestion: review your company point by point, scoring yourself on a scale of 1 to 4. There are 25 points in the long checklist. See if on the long checklist your company scores at least 75, and your company has a yes answer to each question in the short list above.
Tags: Angel Financing for Entrepreneurs, angel investment, Angel investor, Susan Preston, Tech Coast Angels, venture capital, Venture capital funding, venture capital investors
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