Editor’s note: “The Angel Connection” is a regular feature in WRAL Local Tech Wire. LTW asked consultant Bill Warner to share advice for entrepreneurs seeking angel investors and/or venture capital investment. He is chairman of the Triangle Accredited Capital Forum, an angel investor network with over 100 members throughout the Southeast.

RESEARCH TRIANGLE PARK, N.C. — With credit tightening and the markets crumbling, entrepreneurs are facing a rapidly increasing competitive situation when vying for angel money. Angels are going to be a lot more selective and pick only the best opportunities, with best being defined to be:

  • Quick to profitability
  • Quick to positive cash flow
  • Quick to exit
  • Managed by an extraordinary team

So what is new about all that? Nothing really, but the pressure to be right and to really achieve it has gone up an order of magnitude. Entrepreneurs are going to have to make fewer mistakes, because there is not a lot of room for more financing to make up for them.

Angels are different than institutional investors. Institutional investors, like venture capital firms, have limited partners that provide the funds under certain financial performance terms. Angles are investing their own money. Angels care about their portfolios in many of the same ways as institutional investors, with one exception. Angels have a deep desire to see the entrepreneur become successful, and will be very much more forgiving, flexible and supportive during tough times. They, like the entrepreneurs, are the ultimate risk takers with a passion for the business surpassed only by the entrepreneurs themselves. But, like the institutional investors, they want to make money.

Raising angel financing is going to be much tougher, which will require entrepreneurs to present a very compelling business proposition that materially demonstrates a plan for rapid success:

• The description of the market will have to be well vetted. Paper analysis will not be good enough. Entrepreneurs will have to show that they have really tested their market entry with real customer feedback and survey results. If angels cannot see and talk to real and potential customers, the entrepreneur may be passed over.

• Entrepreneurs better know their competitors’ businesses about as well as they know their own. No more passes on competitive matrixes full of yes’s and no’s, and loosely spelled out SWOT analyses. Angels will need to see examples of competitive situations where you are winning as verified by customer feedback. It can’t be just the entrepreneur saying they have a winner. A buyer or potential buyer will have to say it.

  • Marketing strategies are going to have to come alive with real contact information and lead generation productivity assumptions that have been verified by test marketing programs. The Excel spreadsheets will still be needed, but verification of the assumptions will be required.
  • Sales targets have to be substantiated with an emerging pipeline of sales prospects, some of whom having been contacted and will verify their interest in the entrepreneur’s product or service. A verifiable list of additional sales targets have to be shown that demonstrate great confidence that the first year’s sales targets can be met. It is almost like the company has to have a rocket loaded with fuel and the entrepreneur has the match already lit to launch it.
  • The financial forecast is going to have to be well thought out, demonstrating that the entrepreneur knows how to manage cash. Sold estimates for cost and expense, along with capital purchases, will have to be verifiable. The sales estimates have to correlate with the sales targets in the marketing and sales plans.
  • The management team has to be very strong. First time entrepreneurs are going to have a tough time getting financing without having a seasoned executive at the helm. Angels will want a management team with a proven track record and relevant industry experience. These are the people that will mitigate a substantial part of the risk the angel is taking.
  • Due diligence will become much more thorough. In addition to the usual process, much more scrutiny will be put into customer feedback, alliance relationships and credit worthiness of the company and its backers. Angels are going to have to have organized the due diligence material, showing that they have a good handle on the business and what drives it.

If they haven’t done so already, entrepreneurs should be looking for assistance from seasoned business professionals to help them not only get ready for angel investors, but to help them run their companies efficiently and effectively. Entrepreneurs that form the right teams are the ones that are going to get the gold.

About the author: Bill Warner is the managing partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.