The Small Business Association estimates there are around 250,000 angel investors in the USA. Angel investors are drawn to Chicago's tech renaissance of app developers, game developers, a large Drupal community, product developers for mobile devices and much more. Most -- but not all -- startups are losing money.
I cannot speak for other angel investors, but I'll explain what it takes to get me to invest. The following snippets are based on actual meetings I've had over the past eight months with developers seeking funding for their ventures:
First, the Don'ts
Insist it's a $1 Billion Company: Develop a game app for mobile devices and then don't carry a mobile device with you to demonstrate it. Claim "proof of concept" because you've done beta testing with 100 people on Android but haven't tested other mobile devices. Outsource development to the Ukraine and Pakistan and don't file conditional patent applications. Say you'll someday generate revenue by selling ads linked to your free app, but eschew offers of introductions to advertisers. Ask investors to take a convertible note structured with the least favorable terms. Insist that "giving away" equity would "send the wrong message," because Yahoo or Facebook will buy you for $1 billion. Make it obvious that most of the money isn't going for development; you need to pay yourself a salary. After the Facebook IPO tanks and you can't generate interest in your gaming app, come back and offer to sell the entire company for less than your initial request for seed funding.
Pretend You Don't Need Funding: Watch The Social Network and show up wearing cheap flip-flops.
Miracle Marketing: Tell me your marketing plan is to eventually create a video that will go viral.
Have an Unoriginal Idea in Need of Talent: Start with an idea that isn't patentable, proprietary or original such as creating branded advertising via short entertaining videos for distribution on mobile devices. Propose to lease a mobile delivery platform to distribute the as yet non-existent videos. Claim no one has thought of that before. (Never mind the other two groups pitching the same idea in Chicago.) Explain that your key man is still employed by someone else and can't come on board until your angel gives you the money to pay him. Let your angels know it will take you 18 months -- and you'll burn through a couple of million -- before you break even. Value your non-producing company at $10 million.
Dating Site: Pitch a dating site that sounds like 20 other dating site pitches in the last month. I'd be delighted to introduce you to each other.
Throw Away Success: Design a low-tech useful product, secure a provisional patent and manufacture limited inventory. Then do not respond to my investment offer. Don't seize opportunities when offered introductions and retail contacts to get the sales ball rolling. Sell a few items to friends and family and then generate no further sales. Chase other "investors" that don't pan out and come back several months later and ask me if I'm still interested in funding you.
Take Credit for the Angel Tax Credit: Illinois and several other states offer substantial angel investor tax credits with specific conditions that must be met. (There are Federal incentives in the works, too.) Ignore the fact that informed angel investors want to invest in a business that can make money and don't consider a tax credit part of their return on investment when they evaluate the risk and potential rewards of investing with you. Instead, claim the tax credit is your way of "giving something back," since your company doesn't actually generate any revenue yet, albeit it has lots of expenses with no plan to control overhead. Be oblivious to the fact that your terms of investment violate one or more of the conditions for investors' tax credit eligibility.
How to Close an Investment
Barrier to Entry: If you have a provisional patent, if you've developed proprietary information, if you have a sustainable competitive advantage, if you have previous industry experience, mention it right away.
Skin in the Game: If you've invested your own money, mention it. Explain how far your investment took you and why you need more funding to take your business to the next level. Sweat equity counts, too, so explain what you've brought to the table so far.
Show Off: This is your moment to shine. If you have a developed product, demonstrate it, and tell me how much you love using it and how much I'll love it, too. If it's meant for a man, tell me how much he'll love it when I give him one of your products.
Have a Business Plan: No one expects you to have all the answers, but if you know the right questions, you're head and shoulders above other pitches. Be prepared to both answer and raise questions about your target market, marketing strategy, technology, patents and potential competition. Have some idea of the costs for manufacture, distribution/advertising, operating costs, working capital needed, taxes and more. If you don't have all the answers, don't worry, but try to identify what you don't know and still need to know. Explain where you need help. You're asking for capital and for expertise and connections, so try to figure out in advance what you'll need and why.
Value Your Company: I only consider equity investments. Explain how much of an investment you think you need and how much of the ownership of the company you're willing to give up.
If one of the things you need help with is how to value your company, you're not alone. But come prepared to seriously discuss the issues. If we can eventually agree, you've got a deal.