Episode 2 – Is angel investment right for you?

In this episode, we explore whether angel investment is right for you, and the types of founders and companies that angel investors find attractive.

Get to ‘no’ quickly!

Building a startup is extraordinarily demanding, consuming your time, energy, and finances for years. Taking on angel investors means giving away ownership and potentially ceding control of your company. Angels seek early-stage ventures with high growth potential — typically expecting 10–30x returns over 7–10 years. Your company should have a scalable product (not a service), target a large international market, and offer something uniquely difficult to replicate. A typical angel round involves hundreds of thousands of dollars and takes three to six months to close. The episode’s core message is “get to ‘no’ quickly” — if your venture doesn’t fit the angel investment profile, don’t waste time pursuing it; explore alternatives like bank debt or industry investors instead.

Homework for this episode: review the following criteria, and explain how you can, or will be able to meet them in future.

1. Ready to work really hard
2. Prepared to give away significant ownership
3. Ambitious venture that can grow quickly
4. Have a strong team
5. Know how to sell locally (and distrubute globally)
6. You’re unique in some hard to replicate way
7. Need hundreds of thousands of dollars
8. Can show how investment will contribute to growth
9. Convince investors you can execute

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Transcript:

Episode 2 – all about you

Kia ora koutou, hello and welcome to Episode 2 of nzangels.com – a guide to raising angel investment in Aotearoa New Zealand. I’m Dave Moskovitz, one of New Zealand’s most experienced angel investors.

This episode is all about you. We’ll answer the question, is angel investment right for you and your venture? One of my bits of advice that I’ll give you repeatedly in this series is, “Get to ‘no’ quickly”. If angel investment isn’t for you, let’s try to land that right now. Don’t waste your time, energy, and resources chasing impossible dreams.

Not all companies are investible, and neither are all founders. It’s also true that not all founders are suited to build startups.

Let’s start there. Building a startup is really hard. Hard to the power of hard. It will suck up 150% of your headspace, energy, finances, and will to live, in most cases for a period of between five and twenty years. You’ll likely be thinking about your startup 24/7, from before you wake up in the morning until after you go to sleep – should you be lucky enough to get any sleep. Your friends and family might not see much of you any more. Most startups reach a point, at least once, where the directors sit around a table and wonder, “how the hell are we going to make payroll on Tuesday?”, which is when you figure out how much is left on your credit cards and whether that will cover your short-term operating deficit.

Paul Graham, the founder of Ycombinator is famous for saying, “Running a startup is like being punched in the face repeatedly.”

Once you get investors on board, you’re committed to other people who have trusted you with their hard-earned money to deliver on promises you’ve made in an investment pitch. Are you sure you really want that? Can you manage that level of stress?

Is angel investment right for your company? You’re going to have to give away a chunk of your company in return for the investment you take in, when your angel investors become shareholders in your company. As time goes on and you raise more and more money, and give away more and more of your company, your ownership of your company will be reduced. Unless you play all of your cards correctly, you may eventually need to cede control of your company to your investors, who might decide that they want to replace you as the CEO of what you thought was your company. This happens. Later in this series we’ll talk about ways of mitigating that risk, but when you bring investors in, you will no longer be able to call all of the shots.

Is your company going to be attractive to angel investors? Angels are looking for early stage companies with high growth potential, and teams they believe can realise that potential. Most angels want to see the ability to earn a large multiple return on their investment, 10-30x in a 7-10 year timeframe. So for example, if they invest $100k in your company, they’d like to see the potential for that investment to return $3m or even more. Again, we’ll go into the details later in the series, but if you’re only planning on growing your company at 10% per year, that’s not going to be interesting to angels.

Angels invest for growth. You need to be able to show in convincing and specific ways, how the investment cash will be used to grow the company, rather than just keeping the lights on or repaying debt. Are you planning in issuing dividends? That’s not what angels are looking for, we want you to plough every cent of free cash back into growing your business, and we’ll all be happy when we get a solid capital gain.

Typically, your company will need to have a product (not a service) that you can easily reproduce at a low marginal cost, and that you know how to sell into a clearly identified large and growing market, probably overseas. With only 5m people, Aotearoa New Zealand is just too small a market for most businesses to grow enough locally to be attractive to investors. If you’re selling overseas, even in our digital age, that means you’ll likely be spending a lot of time in airports. There are exceptions to this rule, but they’re few and far between.

So if you have a business that is dependent on a variant of selling people’s time to make money like consulting or hospitality, you’re probably not going to be of interest to angel investors.

You also want to be doing something unique that’s hard for others to replicate. Patents are good for some types of company, and not necessary for others, but if someone else can easily copy what you’re doing at scale, that’s a problem. This criterion also rules out the entire class of businesses that are “X for NZ” – and even if you can score an exclusive license for NZ, our market size here will place a limit on the ultimate maximum size of your venture. Not investible.

How much investment money do you need? A typical angel round is in the hundred of thousands of dollars per round. If you need millions in one go, angel investment is probably not the right solution for you. Conversely, if you only need thousands, angels are unlikely to be interested. Again, we’ll discuss this in detail later in the series.

When do you need the money? A typical angel round usually takes three to six months from your first pitch until money in the bank, all going well. If you need the money next week, angel investment is not for you.

So, in short, for angel investment to be right for you, you need to:

• Be ready to work harder than you ever have for what could be many years
• Be prepared to give away significant ownership of your company
• Have an ambitious venture that can grow quickly
• Have a strong team
• Know how to sell your product locally and have an idea about how to distribute globally
• Be unique
• Require somewhere in the range of hundreds of thousands of dollars
• Be able to show how the investment will directly contribute to growth
• Convince investors that you have a team that can execute your plan

We’ll talk about all of these things in more detail later in the series, but the key thing for now is that, if you don’t think you can ever fit these criteria, angel investment is probably not for you. Don’t waste your time, and avoid a world of pain. There are other options available to you for financing your company – bank debt is always a good place to start – it’s non-diluting. Depending on your age, the bank of mum and dad might be an option. You might be able to find someone in your industry who wants to buy into your business. But if you don’t fit the profile of the types of companies that angels invest in – early stage, strong team, high growth, large market, internationally scaleable – then you might find it more productive to put your effort elsewhere.

On the other hand, if you think that you can meet these criteria, then game on! Let’s do this!

Your homework for today’s episode is to look at those criteria, and explain how you’ll eventually meet them, even if you can’t meet them today.

The pithy quote from this episode is: Get to “no” quickly.

The next episode is about me. I’ll tell you my story, and how I became to be one of Aotearoa New Zealand’s most experienced angel investors, and my motivations for making this series. This will give you context about the advice I’ll give you, and confidence that I’m sharing first-hand knowledge that was hard-won, not just random factoids stuff I read on social media.

That’s it for now – until then, ka kite!