Fundraising · Angel investor

What to expect from a first meeting with a Business Angel?

Jacob Remanius Co-founder at Catandra

November 21st, 2014

On monday, I'm having a Skype-conference with an angel investor who might possibly be interested in investing in my healthcare tech start-up. The BA has already gained insight of my business plan. What type of questions can I expect? And in general, what is he interested in knowing?

Any answers are welcomed!

Regards,
Jacob
As a founder, you’re always in fundraising mode (whether active or passive). In this course, we’ll teach you how to successfully raise follow-on capital, establish a valuation for your company, build an investor pipeline for your next round, and more.

Near Privman Googler, Startup Advisor

November 21st, 2014

Think about the situation from the BA's perspective: You are considering handing over a relatively large sum of money in exchange for a stake in a startup's success. You have very little insight into their business, even if you happen to already be familiar with the market they are operating in (much more so if you are not), and you don't have any personal history with the team - so the risk for you is very high.

It's true that the high risk is an inherent characteristic of venture capital investment (hence the name), and we as entrepreneurs tend to take it for granted, but investors are about as risk-averse as the rest of us, for the most part. They know how low the general startup success rate is, and even if they pride themselves as being better judges of potential than others, they know most of their investments are not going to yield a return (at least in the case seed stage investments).
So almost everything an investor asks or does in their interactions with you is focused on assessing and mitigating the risk.

For an experienced investor in a seed fund deal, the most important parameter is the team. She knows the idea you are working on is likely to evolve, your market segment is likely to shift, and the technology you use may well need to be rebuilt entirely before the ride is over. The one constant parameter (in a good scenario) is the team. So expect a lot of the questions to be around the people, their background and skills, their history together, and the division of responsibilities within the team. She would want to know you have all the critical product and business skills (which are hard to outsource) in-house, and that professional aspirations are not going to cause founders to step on each others toes, or make it harder to incorporate key hires into the company.

She is also likely to focus on your short term plans, namely the duration the current investment is expected to last. Partly because it will give her insight about the way you plan and manage your business (and how open you would be to listen to her input), and partly because she wants to assess how likely you are to reach a significant milestone before needing to raise more funds. If you run out of money without having accomplished something big, she will regret her investment, because the next investment is going to be either at a lower risk or a lower valuation, or both, which means she lost money already, even if the company keeps going (the only scenario where the loss is acceptable is if you are a very sought after investment and being on the cap table gets her foot in the door, but that is extremely rare).

Unfortunately, many seed investments fail to take the venture to the next level before another infusion of money is required, partly because of the pressure on founders to down-play the time, effort, and costs required to fulfil their plans. She will want to be critical of your estimates to reduce the that risk. However, your first conversation might be a little premature for such scrutiny.

This is getting to be a rather long rant, so I'll make one final note: the decision to invest, like all human decisions, is ultimately an emotional one. Despite all the careful thought and assessment that usually goes into the process, investors will make the decision to invest in your company if they like you and your product, and feel that investing in you with will make them look good by association. The rationalisation of the decision comes later :)

Good luck!
Near

Sean Goldsmith Interviewing The Worlds Top Franchise Experts

November 21st, 2014

Hi Jacob,

I have dealt with a number of business angels and I have to say that I was surprised at how interested they were in me as a person. I think the No1 thing to ensure is that you know what you are talking about and can do so with conviction and enthusiasm. 

At the end of the day they are investing in you as a person. If they feel confident in you, they are much more likely to invest. 

So the best advice is to be confident and most importantly, be yourself. You'll be fine mate!

Mike Green Co-founder, ScaleUp Partners LLC

November 21st, 2014

You can expect a range of questions from deep dive into your specific milestones and how you plan to reach them and the timetables involved, to who the members of your team are and the chemistry of the team (what happens when things get touch, don't go the way you initially thought, need to tweak or pivot), to your exit strategy and expectations of valuation of the company at exit or perhaps the next milestone (when maybe a VC will come in and buy out the angel). 

Investors have to know what's the ROI. So, expect to show how there will be a 10X to 20X return (or more) in the timetable you lay out for the investment. The angel isn't going to get paid based on the revenues of the company, but rather the growth of the valuation of the company (its worth on the market). So, you might even get asked whether the founder(s) are willing to step out of the role of CEO if there's need to bring in someone more experienced and capable to play that role on the team. 

You can expect questions about your cap table and how many other investors are involved, how much the founders have invested, how much is common vs preferred stock, what's your strategy against dilution, when is your projected break-even point, what's the protected intellectual property of the company and how is it protected, what's your "secret sauce" and what are your assumptions upon which your 5-year projections are based, and how will you use the funds invested by this particular angel.  

These are just a few of the questions I think you will be asked, and should be prepared to address.

The angel is probing to see how well YOU know your business and the market you're entering. So you'll get questions about the competition, your competitive advantage (yes, it's in the biz plan, but be prepared for additional questions), your strategy for market penetration (assuming you already have market validation) and how you expect to overcome setbacks/obstacles/challenges to your assumptions.

The angel will likely ask questions that probe to determine how committed you and your team are to the outcomes, and whether you're prepared to weather any and all storms. Since the road to success is often circuitous, your level of commitment (and flexibility without losing focus on the mission) will probably be the undercurrent of some line of questioning.

And since angels are investing their own money (and not institutional funds), they may have a personal interest in your service or product. They may also be interested in a board seat to have some oversight of their investment.

Be prepared to address the dreaded "burn rate." How much will you spend each month, on what, and why.

Well, that's a lot to think about. I'll leave it there.

Good luck. 

Anonymous

November 21st, 2014

In my recent experience, I realize questions vary depending on the person and how they're connected to you. On average I've heard the following: What is your market size? Use of proceeds? Whats the rate of return? Does your project solve a problem? Competitive landscape? Competitive advantage? What makes your different and why should I invest in your? In reality, you'll never know what an investor is going to ask, but the more you speak and build your confidence, the easier it gets. Don't be too nervous and answer everything realistically. Reach out directly if you have more questions. Best, Frank

Bob Crowley Investor, Entrepreneur, Athlete

November 22nd, 2014

Jacob, as others have said ^^^ in excellent posts, it's mostly all about you, and your team at this stage.  Good ideas have become great because of excellent people but rarely do mediocre teams succeed even with the best ideas (occasionally even a blind squirrel does find a nut, but that's because it fell and hit them on the head :-).  Good luck and keep us posted.