Pitching your startup to angel and VC investors can seem like groundhog day – doing the same thing over and over and over. Let’s do the math. The average angel writes a $25,000 check. You have to pitch to at least ten or twenty investors before getting to a “yes”. The average startup raise is about $1 million. That’s $25K times 40 investors times 20 pitches each, leaving you with 800 pitches to get to your million dollar raise on average. Many of those pitches include follow-up and due diligence questions, requests for documents and meetings and more. Frankly, it’s amazing that anyone gets through a raise with those odds.
Many founders are looking for what we call the “beer and a check” investor. That’s someone who has a beer with you and falls in love with your passion and the company and they write a check on the spot. Investors like that sound great, but they’re as rare as unicorns and harder to find.
I get a lot of emails from founders that say something like “we’re looking for just one or two investors to fund our million dollar round.” These founders don’t understand that most angels want to spread out their risk into ten, twenty or more deals, so they probably shouldn’t be writing $500K checks unless they have a net worth of $50 million or more. Those angels are hard to find too.
The reality is that most angel deals are done through Syndicates. What that means is that a bunch of angels will get together and invest in the deal. There may be some angel groups, some individual angels and some micro-VCs in the deal, all working off the same term sheet at the end of the day. The syndicate “leads” do most of the diligence work and often write up a memo to share with other investors, though many are reluctant to share because of perceived liability if the deal goes south.
Our job as angel group leaders is to eliminate (or at least reduce) startup pitch groundhog day. Ironically, that often means that we’ll take more time from you than that “beer and a check” guy, but in the long run, you’ll end up spending way less time by working with a professional established angel group than with with a lot of individual investors. We take a few weeks to do diligence, and if you’ve got your information organized, that will require very little time on your end. We create a professional diligence document that covers all the bases including the product, market, competition, intellectual property, finances, capital strategy, valuation, team, risks, traction and more. Once we’re done, we pass the diligence document by you for a fact check. You’d be surprised how many diligence documents go out from investors with factual errors. Finally, we provide founders with a copy of the report for their use in filling out their syndicate. It’s a great tool since it’s got both the positive traction parts of your story, and also clarity into the key risks. Since every deal “has hair on it”, as one investor described it to me, it’s best to have clarity on those risks, rather than worrying about what hidden risks may be lurking out there. The other benefit of getting a diligence report from an angel group is that you didn’t have to pay for it. Trust me, the diligence services trying to sell you a report that you can provide to investors isn’t worth a penny of the $5K to $20K that they’re going to charge you for it.
Many established angel groups, especially those that are in the Angel Capital Association, have syndication networks to help you fill out your round. So, after you raise from an angel group, they will often introduce you to their network partners who will be glad to take a look since you come well recommended by people who share their values and negotiate on pretty much the same terms. We’ve spent years building trusted relationships with angels and angel groups around the country that we know we can safely invest with together and now over half our deals are syndicated with both inbound and outbound deals.
So, while working with established angel groups may take a little more time up front, they’ll save you countless hours on the back end by having to go through diligence only once, and by pitching to sometimes hundreds of angels at one time.
If this sounds good to you, check out Rockies Venture Club, or check out the angel groups on the Angel Capital Association web site.
Peter Adams is Executive Director of the Rockies Venture Club, the longest running angel investing group in the U.S. Peter is on the Executive Board of the Angel Capital Association and he is also managing partner of the Rockies Venture Fund I and the Rockies Impact Fund. Peter is author of Venture Capital for Dummies.
Join us for the Angel Capital Summit, March 10-12, 2020 in Denver, CO