Angel Investing 101: Founders, pitch with your exit in mind

Just as the Great Recession saw the emergence of companies like Uber and Airbnb, the pandemic and the current recession have seen entrepreneurship and startup formation surge worldwide. Funding the high-growth-minded ventures we so often see in the tech sector can require the financial support that only an investor of a certain level can provide.

Angel investors offer capital to early-stage companies in exchange for equity. In a recent Keiretsu Forum Investor-Entrepreneur Academy discussion with Steve Cohen of Morgan Lewis Bockius, Philadelphia-based angel investor Scott MacColl and Soteria Battery Innovation Group CEO Dr. Brian Morin shared ways to be sure angel investment can be a beneficial experience for both investors and founders.

Call it Angel Investing 101. Here are seven key takeaways from their conversation:

The more investment options angel investors have, the better.

MacColl said angel investors can find better success when they have more investments in their portfolio. They also need to consider what the size of the investment they want to make early on, because it is common for angel investors to make additional investments in their portfolio companies.

“You need a diversification of risks to improve your chances of earning,” he said. “I look at angel investments as a portion of that. You need to also diversify within the angel investment category. If you’re investing in less than 10 companies, you’re rolling the dice.”

Investors need to understand the risk that comes with making their investment.

Using a personal experience from the Great Recession, Morin illustrated why it is important for angel investors to understand the risk that comes with making their investment: A business partner at the time experienced immense loss when the real estate market was turned upside down.

“In June 2008, I had a local doctor put in $3 million leading a $5 million round. I didn’t know his net worth was $7 million before the economic downturn,” he said. “He had invested heavily in real estate. We want not just investors, but financial partners. We owe them a good return but we need patient, smart money.”

Startups need good management in order to succeed.

For MacColl, whether or not he wants to invest in an idea can often be decided by whether or not he aligns with the team managing a product or service. The product or service may catch people’s attention, but taking that to the next level of growth only happens with the right team of people.

“If you have the right individuals leading the company, the odds of success are incredible,” he said. “They have to know how to pivot throughout the process and execute. There are so many hurdles that rise through the startup phase. There will be issues you run into you never dreamed you’d run into. It’s [about] identifying that management team and being able to execute going forward.”

But funders, be aware of network effect, in which the tendency to further invest in a community gets stronger over time — which can maintain racial inequity in a majority-white-male field.

Investors want to understand why they’re needed.

In MacColl’s experience, entrepreneurs know their product or service well. The issue he finds is that they assume the investors they present to are familiar with their offering, too, when in reality, it might not be a technology or sector they’re familiar with, even if they’re interested in investing. Founders should be clear on the basics before hoping to get an investor on board — and clear on why they’re seeking the support of this particular investor.

“Start with assumption that people you’re presenting to have no idea of what your product is,” he said. “Many entrepreneurs are smart and know their product well, but it will go over the heads of most of the people you’re talking to. What’s the problem? What’s the solution you’re providing? Why is it proven?” And then, how can the person you’re pitching help, beyond funding?

For further reading: “Investors, be aware of these power dynamics when interacting with founders.”

Exit strategies need to be pitched during initial presentations.

For angel investors like MacColl, approaching the beginning of a potential partnership with a founder works best when everyone thinks with the end in mind. According to McCall, angel investors are not pitched enough about what exit strategies look like.

“The entire presentation needs to focus on an exit,” he said. “If everything is geared toward answering the question of how will we exit, you will be successful. What are the potential returns that are realizable?”

Actionable goals can help validate an investment.

While it can be tempting for founders to move quickly to prove to investors that their investments matter, Morin said actionable, reachable goals need to be in place for founders to work toward first.

“There has to be a reasonable probability that if milestones are hit, there will be a successful progress into the next round,” he said. About his own technology company that’s planning to exit: “If I sell Soteria [once], I’m going to do it again. Because of that, being fair to the investors is the most important thing. As an entrepreneur, we need investors to get the best return. We need an appropriate level of dilution so that we can get to the next round.”

McCall agreed and said that an expensive valuation could lead to investors being less interested since the return on their money may seem less worthy of the risk involved.

Communication between investors and entrepreneurs is more important — and easier — than ever

As the pandemic has changed how business is done across industries, Morin said remote work and communication has changed how entrepreneurs connect with investors in other places.

“It has completed erased geography as a filter for who the angel investors are and it’s made the communication easier,” he said. “If I have an investor shoot me a question, I send my Calendly over and the technology has just made things easier. Other than time zones, geography is completely irrelevant. In the second quarter last year I would’ve given you a different answer, but now I believe it’s a lot easier.”

It’s something we’ve heard across multiple market. From Anders Jones, CEO of Baltimore’s Facet Wealth, during a VC panel last month:

“Now more than ever, VCs are comfortable investing in any geography,” he said. “The geographic barriers are totally gone at this point. VCs have been meeting teams and writing checks over Zoom for the last year-plus, and I don’t think that’s going away.”

Michael Butler is a 2020-2022 corps member for Report for America, an initiative of The Groundtruth Project that pairs young journalists with local newsrooms. This position is supported by the Lenfest Institute for Journalism.