This is a guest post by Yaniv Nizan*
When I started SOOMLA, The In-App Purchase Store Solution, I thought fundraising would not be that difficult. In 2008, the first company I co-founded, EyeView, raised a round from 2 Venture Capital (VC) firms when we were very green. This time around, it will be much easier I said to myself. I’m much more experienced, have put together a strong team, validated the heck out of our business model and have good relationships with most VCs in Abba Even Avenue (that’s the Israeli version of Sand Hill Road for those not familiar with the Silicon Wadi).
I couldn’t be more wrong.
Funding is never easy. Even when you hear stories about entrepreneurs who walk out of a VC with a personal check from the managing director, it is usually after 6 months of pitching and hearing ‘no’. Moreover, the world has changed and raising VC money in 2012 in Israel has become harder. I soon realized that I had to restructure if I wanted to raise funding for SOOMLA.
The first difference (challenge?) one notices right away is that while VCs are highly visible, Angel investors mostly fly under the radar. The reason is simple: in addition to being angel investors, they usually have a different day job (e.g. the CEO of some other company or an entrepreneur who sold their previous start-up). One of my investors doesn’t even have a Linkedin profile. The truth is that anyone Executive in a big company can be an Angel, even if they don’t know it yet.
I discovered potential investors in a few odd situations: interviewing for a job, swimming at the pool and taking my daughter to pre-school. In other situations, a VC referred me to an angel when I realized that I already met him before I knew he was an angel.
Once I found Angels, I assumed it would be the usual investment pitch drill, but I was wrong. I went to one meeting, told the Angel that I want him to invest in my startup (he recently sold his company to eBay) and he completely shut down. The guy has the money and he is better off investing it for tax reasons so what went wrong?
Wooing private investors is very different from wooing VCs. Most angels you will pitch too are highly accomplished people that have a passion for building stuff and love to help. But they don’t want to be thought of as a proxy for their money. When reaching out to Angels, it’s important to respect what they have accomplished. To make the Angels feel like they are part of the evolution of the company’s story (better yet, actually make them part of the story) and allow them to help with introductions.
As an example, I approached an accomplished entrepreneur as a potential advisor in SOOMLA. After he gave me some great tips I discovered he is also an early stage investor and he became our first investor.
As you can imagine, the presentation one shows Angels is different from the presentation one would show to a VC. In my presentation, I told one Angel that we needed $250K to build a Proof of Concept (POC), and that later on, we are planning on raising $10M in 3 VC rounds. That was not a good idea. First, the likelihood for any startup to raise $10M from VCs is1%-3%. Second, and more important from the Angels perspective, if we were successful in raising 3 VC rounds later on, the result for the angel would have been a diluted position with no way to defend it.
It’s not just the slides that need to be different for angels. The entire business plan needs to be leaner when pitching to Angels. As a result, we created a much leaner plan, focusing on the one thing that our customers were willing to pay for and showed how we can be breakeven in 10 months with no additional investment. Our PowerPoint presentation had no bullshit market forecast slides or barriers to entry analyses. Instead, it was focused on how to get revenue and be profitable. The examples we used were of companies that raised little and sold quickly in the sub $50M range.
I’m not going to include the slides I used. They are below average on any standard and most of the investors didn’t even see them. I can, however, refer you to the slides that Joel and Leo from buffer uploaded and stress out their most important point that you need to focus 100% on traction before you even think about raising money.
Everything we learned brought us to a situation where we were able to generate a lot of interest and it was time to start closing. VCs normally initiate the closing move by giving a term sheet. With Angels, however, you have to make the first move. The right moment to start is when you have a weighted pipeline estimation that exceeds the minimal amount of the round. A weighted pipeline is a tools from B2B sales where you list all your opportunities and assign a probability to each one of those. Multiply the probability by the expected investment to figure the angel weighted contribution and sum all the contribution to get the weighted pipeline net. An important tip with regards to that is take off 20% from whatever probability you initially assigned.
|
Probability
|
Amount
|
Weighted Amount
|
|
|
Investor 1
|
40%
|
$100,000
|
$40,000
|
|
Investor 2
|
60%
|
$150,000
|
$90,000
|
|
Investor 3
|
20%
|
$50,000
|
$10,000
|
|
Investor 4
|
20%
|
$100,000
|
$20,000
|
|
Investor 5
|
20%
|
$100,000
|
$20,000
|
|
Investor 6
|
40%
|
$200,000
|
$80,000
|
|
Investor 7
|
20%
|
$50,000
|
$10,000
|
|
Investor 8
|
20%
|
$100,000
|
$20,000
|
|
Investor 9
|
20%
|
$100,000
|
$20,000
|
|
Investor 10
|
40%
|
$50,000
|
$20,000
|
|
Total
|
$1,000,000
|
$330,000
|
As soon as I reached that point I started discussing the terms with the angel who had the most potential of leading the round. While that investor wanted to lead, he wasn’t he didn’t know the industry well enough to make quick decisions about the investment. Without a leader, I was trying to close a round with 5 different angels at the same time. Each of them making different demands. Moreover, I had a risk that the entire thing will fall apart so I was doing that while taking more meetings with new Angels to generate a backup plan and keep the closing pressure. , which ended up being the winning tactic. One of these new angels liked what he saw and suggested leading the round. Once I had a lead investor on board, the remaining negotiations moved faster and the round closed pretty quickly. Ultimately, I lost that first investor, but it was a small price to pay. In retrospect, I’m not sure we would have gotten the lead investor without the first one.
The importance of Angel investors in the investment eco-system is only increasing, which is why I want others to benefit from our hard learned lessons.
** Yaniv Nizan is the CEO and Co-Founder of SOOMLA, the platform for Creating In-App Purchase Stores for Mobile Games. Yaniv is also a writer with articles featured in various publications and a regular speaker industry events. You can follow Yaniv at @y_nizan
I'm a former general partner at google ventures, head of Google for Entrepreneurs in Europe and founding head of Campus London, Google's first physical hub for startups.
I'm also the founder of Techbikers, a non-profit bringing together the startup ecosystem on cycling challenges in support of Room to Read. Since inception in 2012 we've built 11 schools and 50 libraries in the developing world.
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