TES 009 - The Keys to Angel Funding

Hey there, real quick before we jump into the episode, listen, if your earnings treadmill hasn't set you free yet, running faster won't either. Listen, hustle without principles just going to burn you out. So here's what I want for you. I want you to join me for my money machine experience live. It is three free trainings. Deep dive into how to escape the treadmill and build a money machine that actually works for you. All right, grab your spot here by going to moneymachinelive.com and I'll see you in the free training. Hey there. I'm Mel Abraham, the author of the Entrepreneur's Solution and the founder of Business Breakthrough Academy. And welcome to this episode of the Entrepreneur's Solution show. And I'm real excited about this show because in this one, in this episode, I'm going to get a chance to answer a question that has come across our voicemail line, which a lot of you are using and leaving questions. So we're going to start answering those questions on these shows. And this question has to do with the element of angel financing. You know, what is angel financing? How does it go? What's the process like and what does it take? So after this brief introduction, I'll be back to answer that question about angel financing. See you soon.

Welcome to the Entrepreneur Solution, where highly successful entrepreneur Mel Abraham becomes your entrepreneurial mentor. Here, Mel reveals his business building strategies and even gets a chance to answer your questions. Mel Abraham, a CPA by education, but an entrepreneur, entrepreneur by exhilaration and a true believer in the entrepreneurial way of life. It's through entrepreneurship that we create community, support society and live our dreams.

It's where possibility meets reality again and you can have the life and lifestyle you want. One of freedom and peace of mind. Welcome to this episode of the Entrepreneur's Solution where it's time for you to be bold, dream big and live life your way.

Hey there. I'm Mel Abraham, the author of the Entrepreneur's Solution and the founder of Business Breakthrough Academy, where we teach you how to design a business and create a life, a life of financial freedom and peace of mind. And welcome to this episode of the Entrepreneur Solution show. And in this specific episode, we're going to get a chance. I'm going to get a chance to talk, you know, not necessarily directly, but to answer some questions, answer a question that came in through our voicemail line. And it's about angel investing and I about angel investors and what is angel financing all about? And so let's listen for a moment to Bill Paravano's question and then we'll come back with some answers and some information to help Bill out and to help the Entrepreneur Solution Nation out.

Mel, it's Bill, the knee pain guru. Great job on the podcast. Thank you so much for offering this. This is fantastic. My question to you, and it came from your podcast number three, the Myths that Can Destroy youy Business and Steal youl Dream. You were talking about angel investing. So my question to you is what is your approach? How do you approach an angel investor? How do you find angel investors? What do you need to have prepared when speaking with them? All of this is really interesting topic and very present for me right now. So I'm curious to hear what you have to say and what you have to share. Thanks again so much for doing this and I'll speak with you soon.

Great. It's a great question, Bill. And so here's the thing. Let's just, let's break it down and we'll go back to the basics. I want to touch on a couple things. One, what are angel investors and what is angel financing? Where do we find it? And some people are confused with, they confuse angel financing with venture capital financing. So let's, we'll clarify the difference between the two. When should you go after angel investors, if at all, and why? You know, why would an angel investor put money into your business? What do they get? And then what's the process that you can expect to go through as an entrepreneur, as a business owner, as someone looking for financing for a business, an idea, a product or something of that? And then what's the reality of what the process is like? So let's just start for a moment to look at this. So.

What is, a lot of people say, what's an angel investor? Well, typically what it is is someone that has a high net worth, that is typically a past entrepreneur. They've lived the entrepreneur life and now what they want to do is they'd love to invest and they want to invest in ideas, they want to invest in management. They want to invest in things they believe in. They want to invest in a sense to give back. They look at it as a vehicle in which they may be able to add value to the product, the business, the entrepreneur, the services, through mentoring, advice. So it's not just a financing arrangement. Typically it carries with it some sort of connection with the angel investment or angel investment group. We'll talk about some of the investment groups in a moment. But it carries with it some mentoring and some advice which is really kind of cool for the entrepreneur because what they're doing, what you're doing is getting not only the funding, but you're also getting access to the brain trust, the brain power of people that have been there and done that and have been successful with it. And like I said, most of them are prior or past entrepreneurs themselves. They will typically invest for a return on investment. So they're going to make an investment with the anticipation that they're going to make money on their investment. And they also expect that they're going to participate in the entrepreneurial process. This is the way that they stay in the process. Many angel investors have had their businesses built, their businesses, and many of them have sold them and now they're doing other things. And so once that entrepreneurial bug bites you, once that entrepreneurial blood is flowing through your veins, you can't get rid of it. And this is one way that many entrepreneurs stay in tune and stay connected with, with the entrepreneurial world and the entrepreneurial lifestyle. They may not be doing hands on work, day to day operations, but they're doing mentoring, they're doing work with it. They're seeing businesses grow, they're seeing people's dreams come alive. And so they'll invest for return, they'll invest to give back, they'll invest to participate in an entrepreneurial journey. And you know, some statistics, and these are statistics are a couple years old, but.

It'S estimated that angel financing, angel financing, was $19 billion and about 55,000 businesses were financed with $19 billion a number of years back. And so what you need to realize is that it's a vast amount of cash and money and availability that is out there for the right businesses with the right fit, with the right angel investors at the right time. And we'll talk more in detail about what that right time and the right fit. Many times angel investments are more localized geographically and part of that has to do with the mentoring and the participation that the angel investor is typically going to go through.

When you look at angel investors, sometimes you'll get a single investor. But now what's happened with angel investors is they've come together as groups. There's actually angel investment groups like out here in Southern California, there's the Pasadena Angels. And I've invested through them a number of times. In Pasadena Angels, it's a bunch of entrepreneurs that come together to review proposals, to meet regularly, to do due diligence, to hear pitches from entrepreneurs, to listen to dialogue and look at things and then they'll make a decision as a Group, you know, yeah, this is good, this isn't good. And then the individuals in the group can choose to invest their money or not. It's not done like a hedge fund where all the money is pooled and then put in there. Each member of the group has the ability to make the decision that they're going to invest in this investment or not that investment. But as a group, they decide which investments are going to be brought to the meetings and reviewed and looked at. And so when you look at angel investors, you can look at anything from small dollars, 5, 10,000 DOL investments to as high as $2 million potentially. So it is a substantial amount of availability. It is a big impact for the right businesses at the right time or the right products when they fit. It is a great way to bridge over once you've exhausted any other resources that you might have that are family, friends, yourself and that type of thing. So where do you, where do you find angel investors? If you. Now you can go in and do a search for angel investment groups and you can find them, but you can try a couple of associations. So there's the Angel Capital association that you can look up and see what chapters around when their meetings are, what their application criteria is, and go to their sites and look at that. You have the Angel Resource Institute, that is another one that has a listing of angel investment groups and angel investment chapters around the country. And then also think about going to networking events and meeting people, because remember, these are entrepreneurs that typically get involved with businesses. And so when you're at certain networking events, you may find and meet angel investment members, angel investment groups and that type of thing. But I would start with just looking at the Angel Capital Capital association and the Angel Resource Institute as a beginning. If you're looking for an angel investor now, it's not right for everyone. Let's be clear on that. And as we start to look at some of the criteria, you'll see whether you're in the right place or at the right time to consider that. Now, what's the difference, what's the difference between angel investors and venture capital investors, or what come to be affectionately known as vulture capital investors? There's a big difference between an angel investor and a venture capital investor. So angel investors typically use their own money. So when I invest as an angel investor, I'm writing a check, and it's a check that's coming from my personal account or from my assets to invest into a company, into a specific investment. When it's a venture capital, it's Typically what we call institutional money. So what happens with venture capitalists is they get access to money through people's pension plans, other investors. So they got this big pool of money that they get to go and invest as they see fit, based on the investment objectives and the criteria that they set forth, they will invest it. So it's different. A venture capital investor is different than an angel investor because the angel investor is individual money, whereas the venture capital investors are typically institutional or pooled money, if you will.

The other thing that happens is that there's a difference in timing when an angel investor typically invests versus a venture capital investor investing. An angel investor is typically in the early stages of the business, many times in the early stages of business to fund them, to grow and to build and to move forward. So they're early stage investors, whereas the venture capital investors are typically later stage. They want to fund in, they want to put money in and they want to build it, they want to take it out into either to an acquisition or into a public offering. So they need to be able to see that light at the end of the tunnel. So typically they're later stage investors. When you're talking about venture capital investors and then the size of the deals that you see is different between an angel investor and a venture capital investor. So as I said, your angel investors could be as low as $5,000. Whereas, whereas your typical venture capital investments are north of $2 million. So $2 million and up typically. So angel investments are typically 5 to 100,000, maybe 150, $200,000. Whereas your venture capital are going to be north of $2 million. So there is a difference in the process. There's a difference in when, there's a difference in how much, and there's a difference in what they're looking for. So let's talk about when.

Should someone think about going to an angel investment group or finding an angel investor? Well, one, you need to be prepared and you need to be willing to give up equity. What that means is that you're going to give up a piece of the pie. You're going to give them a bit of ownership, if you will, so they're going to become your partner in the process. But the other thing that you need to be willing to give up, and this is a challenge for some entrepreneurs, and that is you're going to need to be willing to give up control at some point. Because that angel investor, they're not make, they don't want to make risky investments. When I make my investments, I don't want to make risky investments. I want to have some control. I want to have some voice. I want to have some say in the process of how you're operating the business. Because I want to protect my investment. Remember, I'm still investing for a return on investment. I want to get not only my money back, but I want to get, I want to get gains on that money. I want to make money on my money in the process. You know, if you've ever had a chance to watch the Shark Tank and a good friend of mine is Kevin Harrington, one of the original sharks, and you look at some of the deals they do and this is a great show for you to watch as part of the Entrepreneur Solution Nation because you'll see how these five billionaires, multi millionaire billionaires, think about deals, how they value the deals, what are the things that are, are critical to them, why they would invest, why they wouldn't invest, what are the things that push them away. And you'll see it's effectively the same type of situation. They want to be able to have control, they want to get a return on investment, they're going to take a piece of equity. The other thing that an angel investor looks for, I'm not looking for long term plays. I'm not necessarily looking to be in a situation where I'm going to be in an investment for 10 or 15 years. So the typical angel investor is looking to get in for maybe three to seven years, then out with a return on their investment. In other words, they're expecting that the business is going to grow and that it's going to grow enough that at some point it's either going to get bought out, it's going to get refinanced, or it's going to go public type of a thing and they're going to get bought out. My angel investments, that's typically what happened. I got taken out by another investment group that came in, which is fine. I made my money. Then they stepped up to another stage and I stepped out and I could have stayed in.

And kept playing the game, but I decided to let them go and let them build.

I look for, and most angel investors look for an openness of communication and that the person and the business needs to be willing to take advice.

If we can't communicate, if we can't have a mentor relationship and a relationship where you're willing to take advice that you're open minded to. The fact that maybe the angel investor has traveled this path and been on this journey and seen the potholes and they can guide you and help navigate you. Then it's probably not a deal that's going to work. If you're simply going to an angel investor for the money, many times they're not going to take it. They're not going to take the deal because they don't want to deal with a situation where if they give advice, it's not going to be considered, it's not going to be thought of, it's not going to be followed. And now all of a sudden their money's at risk because they, because you may be taking decisions that are inappropriate based on what they think. Then we want to make sure that you have an exit strategy, an exit plan. What is the big plan? What's the grand future for the business? What are you looking for in the business? Because if we get in with no idea of how we get out, Remember we talked about begin with the end in mind. In fact, it's one of the nine steps in the three phase process. The last step, the last stage of.

The reach up phase is your exit. What is it? When I go into investment, I want to know what at least the intent and the plan is to take my investment out to get my money back. They will always ask things like is the product developed already? Is it near completion? Do we have prototypes? What stage of it is it in? Do we have market penetration? Do we have market validation? Do we have proof of concept in place? If those things aren't in place, then it becomes really speculative and it's typically not something an angel investor would typically go after. Then I want to see that the entrepreneur that is in the business has already invested in the business. Not only have they invested their sweat capital, but they've invested in some equity and that they've exhausted their resources and that they've really put a lot of skin in the game in order to do that. And that they're coming to me because they've already done their investing and they need another source and they need some additional information. They need some additional guidance to move to the next level. Then what we would like to see is, all right, remember we said that the holding period for this is three to maybe seven years. We want to see some great growth. I want to be able to look at this business, say what is this business going to be? Is this going to be a $10 million revenue business in three to seven years? And we want to see that kind of explosive growth, that kind of exponential growth as a possibility, because that's the only way we're going to get a return on investment. Now, many times angel investments don't go, don't go well. So that's why we look for higher returns because we got to make up for the ones that don't go so well in the process. Not every investment goes well. And then the last thing that I want to look at is.

Do you have a good business plan? So if you've got, if you've got all these things in place, business plan, you've got a fair amount of revenue growth or anticipated revenue growth, you've got your exit plan in place, you're willing to give up equity and control, you're willing to take advice, you're willing, you have an exit plan, you've got a product with proof of concept, then maybe you're ready for angel finance. You're ready to at least approach angel investors and see if it's possible to at least go the next stage and go through the process. So what are other things that angel investors are looking for? Well.

One of the biggest things, and many times people don't really think about this, is a strong management team with experience. When you talk about a small business that's growing, it is driven by the management team. So I'm going to look really critically at the management team. The experience of the management team, how they've navigated the challenges in the past, what is their experience in the past? Is this their first endeavor? Do they have proven skills? It's one of the really big elements. When we start to work with possibility of looking at an angel investment during the due diligence, diligence process, I really want to understand who's the team I'm playing with, who's the team I'm looking for. If it's a single individual and there is no team below them, that's a single point of failure that I'm probably not going to be real comfortable with. Then we want to see what's the uniqueness of the product or service you bring to the table. We want to make sure that we're distinct in the marketplace. The greatest probability of success is coming from the fact that we can position ourselves uniquely and distinctly in the marketplace and kind of the red ocean, blue ocean kind of concept and blue ocean strategy, making sure that we can position ourselves aside from the competition because we've got some uniqueness and distinction that doesn't exist out there that is embedded in our product, our service, or what we bring to the table. We want to understand your personal investment in the company. I want to have a clear understanding of the market and the industry. But more importantly, I want to make sure that you do. Many times people will come to me in their business and they don't have a clear understanding of who their market is. And we'll talk about it in another episode. We talk about what I call market sifting to really refine and figure out who is your core market, who is it that you can do business with, you should be doing business with. But I want to know that you have a depth of knowledge of what your market is, who your market is, what their needs are, how you solve those needs in an elegant way. How do you approach them, that you have access to them at a deep level. If you don't have a thorough understanding of your market or the industry, then it's probably not a place that we want to play because now it's again, and we're just trying to manage the levels of risk and that's too risky when someone doesn't know who they're playing with. As far as the customers in the marketplace goes. Then also I want to look for high potential returns, you know, return on investment. And that you as the entrepreneur, truly, truly, truly understand your numbers. What do the numbers say? It's not pie in the sky projections of we're going to double every year and all these things. But truly understand the numbers and the details of the numbers. That if I ask a question about the numbers, you've got the answers pretty quickly and you can really rattle them off. So.

That'S really what angel investors are looking for. We talked about when you should go to them, if you had those things in place, what they're looking for. Let's talk about. All right, now, you're going to go to an angel investment group or you're going to go to an angel investor. What can you expect the process to be like? And Bill, this is kind of an interesting process and it may shift and change depending on who it is you're dealing with. But in this case, the general process is typically the same. The first step is an application. Now, some angel investors or angel investment groups have a formal application that you need to fill out. Others may say, just submit your business plan or your executive summary. They don't, typically, a lot of times they don't read the whole business plan. They want to just, they want to be turned on by the executive summary first and see if that makes any sense before they go into the detail and invest a lot of time and money in that. Now, some investment groups will have nominal fees to submit the application, but that's the first stage. That's the asking for the coffee date, if you will, or just having the phone call type of a thing. And they'll go through all those applications, they'll go through the executive summaries and they'll decide which ones will go to the next stage. And the next stage is a pre screening. And typically a pre screening is about one to two weeks of where they're going to look at a little more details on the business, on the business plan, the concepts and the product. And if we can pass that pre screening process, you'll go to the next stage, which is really a screening process. This is where we will, as a group, start to review the plan, the business plan in much more detail. We will really start to drive and understand more about the business. Typically 10 to 25% of the submissions will ever get to this stage. Most of them will get filtered out. And if you get past this stage, the screening stage, now we're going to go to an investment meeting. Now this is when you get a chance to meet with the investment group. You get a chance to meet with the, the angel investment group. And what will happen is you're going to need to put together a pitch and it's a short, it's a short presentation of your business, the concept, the risks, the returns, the industry, the opportunity, all of those things. And if you really want to understand how to do pitches and get used to it, watch Shark Tank because you're going to see them all doing pitches. You'll see good ones, you'll see bad ones, you'll see things that, that the sharks don't like. And you can take some of that away and I can talk further about pitches in another episode. But know that when you go to the investment meeting, it's going to be about your pitch and Q and A. So what's going to happen is you're going to do your pitch and then the angel investment group, we get a chance to fire questions at you and see how you articulate the answers and what understanding you have and try to understand it better through a Q and A and a dialogue. So now all of a sudden we're getting a dialogue and if that goes well, if that goes well, then we'll take you to the next stage, which the next stage is due diligence. Now we're saying, hey, let's do some more work. We're going to now take a group of us angel investors and we're going to dig into your books or we'll hire someone to Dig into your books, to dig into the business and really drill down and make sure that everything you said is real, everything you said is true, everything that we thought is reasonable, that the risks are there, what risks are there and what risks aren't there. So we go through a due diligence process. And if you go through that, as you get to this due diligence process, about 25 to 50% of them will actually get through this and get funded. And once the due diligence process is over with, or as we're going through that, the objective of it is to get to the next stage. And the next stage is what we call term sheet. And the term sheet is us sitting down and saying, here's what we're willing to do, here's how we're willing to structure it, here's what we want. And we come to a skeleton agreement. We write up the term sheet and that is used by the attorneys to write up the legal documents to make sure that the deal moves forward on the agreed upon terms. So that's really the process that you're going to go through. The stages, the six effective six stages, the application, the pre screening, the screening, the investment meeting, the due diligence and the term sheet. That's the process you can expect. So if that's the case, what's the reality you can expect? And this is the way that this is going to play out. And I'm just going to be completely transparent and open about what you need to expect so you're, you're clear about it. One is expect a lot of rejection because there's going to be a lot of folks that, that simply say it's not for us. Now that's not a statement necessarily about you personally. It's just a statement that there may not be a match. There's certain kinds of deals that I'll invest in and others that I just won't do because I don't have the knowledge in it. I don't want to get educated in it. I don't want to get involved with it. I think that the risks too, too much. Whatever it is.

It'S not personal. But by the same token, listen to what they say, listen to what they're telling you because there's golden seeds in the rejection. There's golden seeds in there to start to understand if we're seeing the same reason for rejection repeatedly, let's fix it, let's tweak it, let's understand it, let's deal with it in the pitch right from the get Go. So we take the wind out of the sails. Something that we talk about in the. When I do expert witness testimony, we want to take the aha factor. I never want the judge or a jury to look at a fact in a case and go, aha. Because that's going against me. It's like, I got you. So we want to take that out. So there's seeds of wisdom in the rejection, and that's the thing that we want to take away. Know what they're looking for? There's certain angel investment groups that will only invest in certain types of investments, certain types of businesses, certain types of industries. And so understand what it is they're looking for. When you watch Shark Tank and you look at each of the sharks, they have some very unique, distinct backgrounds, and they come from a different place. And certain sharks will be more willing to and more apt to invest certain types of businesses and industries, whereas other sharks say, I'm out. I'm not. I'm not. I can't help here. And that's one of the things that a great entrepreneur and a great investor is really good at. To be able to say, this is the limit of my expertise and my experience, and I know when to walk away. And it may be an absolutely phenomenal opportunity, but not for me or not for this group. So know what they're looking for. Be prepared for the due diligence process. Make sure you got your ducks in a row. Make sure you have systems in place, make sure you have the financials there, and make sure that it can go really smooth. Because if it is a problem in the due diligence process, it raises the uncertainty. And one thing investors don't like is uncertainty. We are trying to limit the uncertainty. And so you can do that by being very well prepared for the due diligence process. Go ahead and ask for references. Understand what. Understand what it is that.

These angel investors are all about. Talk to other people that they've worked with and see what that kind of, in effect, marriage is like. And ask for references. Again, know your numbers. Know your industry and market. Focus on the fact that you want to get guidance more than the money. The money will come along with it. But we want to create a relationship more so than just a financial transaction of money for equity, as that perspective. And remember, communication is the key. We need to feel comfortable that.

There can be a dialogue that you're willing to take advice. And then when you go in and you're trying to build this, make sure that you share your mission and your story. Share it with, with the passion and the energy and the vibrancy that got you to the table, that got you to this point. Because typically, you know, our entrepreneurs are driven and that's got to come out. When that conviction comes out, that's contagious. So you want to share it, share it that way and connect with the angel investment group and the angel investors. Personally, these are. They're people. They're people. They're just like you and I. They're just like every other person. Maybe they've had a different history. Maybe they've got financial resources, maybe they have got tremendous success, but they're just like you and I. Brian Tracy, a good friend of mine, Brian Tracy, he always said that those that are in the top 10% at one point started in the bottom 10% and they had to transcend and transition through that whole process. They're just people. So connect with them on a personal level. And above all else, be transparent and be honest, okay? Be upfront about it. If there's some risks, if there's things that come about, you want to be upfront and honest. And if you do a deal with them and some things become challenges or they don't go the way you want them, you want to make sure that you're transparent and honest through the whole process and do that through the whole process. So I hope, I hope, Bill, that this helps answer your questions, gives you some resources to consider with respect to angel investing. And I know angel investing is not for.

Everyone, but it is an avenue for entrepreneurs that are trying to build their business. If you're at the right time, at the right place with the right group for the right reasons, this may be a great resource for you to use a vehicle for financing your business or moving you through the next stages of growth. So I hope that helps you, Bill, and thanks for the question. For those of you out there that have questions, remember to go to askmelnow.com leave a message for me just like Bill did, and we'll make sure that we get it on one of the upcoming episodes. And if you like this show, make sure you subscribe, go ahead and subscribe to the show to make sure that you get notified every time I put out a new show, which we're doing regularly. And for any takeaways or the show notes for this session, this Q and A session, go to melabraham.comqa1 okay. Melabraham.comqa1 and might as well go ahead and share it with a friend. Let's Give the friends, your friends out there the gift of bringing their dreams and their possibilities back to life again through entrepreneurship. And I hope that you enjoyed this. Look forward to seeing you in the next episode until we get a chance to see each other again. May your vision be grand, your journey epic, and your legacy significant. See you soon. Thanks again.

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