Securing Financing in 2011: No Walk in the Park
Sanay Patel and his partners at Position Tech are ready to take their customizable-cleats business to the next level.
They have a business plan, inventory, purchase orders, established relationships with retailers and will soon be bringing on an NFL player to their advisory board. There’s one major snag: The team can't seem to generate the financial interest from an angel investor group to help expand the company in 2011.
"We have known that if we want to grow we will need outside funding,” said Patel. “We need to do product development...and spend money on marketing and we have to pay for administrative expenses. We approached groups in the Chicago area. Everyone likes the idea, but we are playing in a niche market and they are looking for larger markets where they can hit that home run."
Entrepreneurs looking for early-stage angel capital ran up against a myriad of obstacles in 2010. And while the outlook for investment activity in the coming year is more favorable, according to angel investors, it will still be difficult for companies to find secure funding.
We spoke with angel investors and entrepreneurship professors from around the country about what entrepreneurs should expect this year and what they can do to make themselves more attractive to investors.
Here’s what we learned:
What do you see as an evolving trend in 2011?
"I really think that the incubator model is proving to be very attractive. It allows investors like me to vet out ideas using the incubator process as the filter. Those that graduate out of these incubators have been tested and hardened by the process of being challenged."
- Bill Cesare, www.AngelRI.com
"Angels are more reticent and assets are down. To an entrepreneur, that means it is harder to find an angels who will spend. To me, that means you have to be more professional and treat pitching to angels like you are pitching to a VC fund."
- Thomas Kinnear, Ross School of Business University of Michigan
"In 2011 we will see a continuation of providing capital to existing companies, that is giving more follow on rounds to existing companies than initiating new deals. The good news is that today there are so many organized angel groups throughout the country and most of those groups recommend you engage early in the process to understand their requirements and get through the process."
- Tony Shipley, Queen City Angels
What makes an investment attractive?
"One of the key things we look for is the entrepreneur's ability to navigate the resources that are out in the market today. We look to see if entrepreneurs are able to make connections to succeed, if they get education on the resource pool and learn how to access it. We are finding that the quality of deal flow based on education programs has gone up. We want our entrepreneurs to recognize and understand the environment that they play in."
- Bill Barber, Maverick Angels
"Entrepreneurs need to assemble a team that has full commitment to the project. I like to see an all-in mode where people have a strong personal and financial commitment to the idea. In my experience, it doesn't work out as well when people only put in part time. I also like to see someone on the team, even an advisor, who has been there, done that."
- Bill Cesare, www.AngelRI.com
"Angel investors love non-dilutative capital. We want to see entrepreneurs who have searched for funding like economic development funds or federal money."
- Thomas Kinnear, Ross School of Business University of Michigan
What advice do you give to entrepreneurs seeking capital?
"Create an advisory board and use the advisory for contacts. Try to get people interested in what you are doing and ask them for guidance. Pitch your idea to industry experts. Favor business models that generate cash sooner. Get external validation for your idea. The best way is through creating a product or service and securing customers that can be references. Finally, bootstrap, bootstrap, bootstrap."
- Ira Weiss, Hyde Park Angels, Booth School of Business, University of Chicago
"If you can't talk about your exit strategy, the more professional angels will be turned off. A good entrepreneur does not get surprised by questions about exit valuations. Speak from inception to positive exit."
- Thomas Kinnear, Ross School of Business, University of Michigan
"We want entrepreneurs to think about the flow of the presentation. Follow a flow and you will have a better chance of getting past the screening committee. Finally, if you are really a true entrepreneur, above all else, never give up on your idea."
- Tony Shipley, Queen City Angels