Pitching to Angel Investors - with Russell Brand
Q: You have been a successful serial entrepreneur, turned investor. Tell us more about your journey.
I started three software-related companies that did well enough for the founders to retire, but not well enough for anyone to have ever heard of us.
I first got involved in Angel investing with Keiretsu Forum. They have an amazing due diligence process and as a group is kind, helpful, and supportive to an amazing degree.
Currently, I spend most of my time mentoring early-stage companies in the Founder Institute ecosystem and running a boutique consulting firm helping companies increase their profit by being more responsible: treating their employees better, using more sustainable inputs and processes, and treating their customers more kindly. Unsurprisingly, we’re called Responsible Solutions Limited.
Q: What are the criteria that tell entrepreneurs if they are ready to pitch to angels?
There are two important ways to think about this.
First, talking to angels is extremely time-consuming, it often takes over 1000 hours to get a funding round. So you have to think if you can spend that time to benefit your business in another way. Can your business survive the 1000 hours? Can you use that time to get more customers? Unless you have a team that is working on keeping everything growing while you do the talking, it is almost always better to spend the 1000 hours getting customers than talking to angels.
When talking to angels, you are basically competing with everyone else talking to angels, and there are a lot of angels. As a first step, you need to figure out which angels to talk to. Who would actually invest in a company like yours? It is easy to talk to angels where you happen to have introductions, but if they don’t invest in companies like yours, they are not going to invest in your company.
Because everyone is nice, but usually their investments are narrow and restricted into certain areas and topics.
For most situations, you are going to be compared to other companies that might otherwise invest in on the basis of “traction”. You need to show real numbers of customers that come not just from friends & their referrals, but rather from the process you will be using to get an ever-growing number of users. With such a process, depending on your field, you probably need to be showing 20% month-over-month growth.
While you don’t necessarily have to have a co-founder, you do need a team. You need someone that can deliver the service, someone that can get customers, and someone that can manage money. One person cannot be in charge of all 3 and succeed in a startup.
You need to be working full time on the project, all the while having a clear idea of what to do with the money. Concrete milestones. Milestones that once achieved will greatly reduce the risk for the company and similarly increase its valuation for the next round.
Q: Do you advise startups to raise angel investments or not at all?
We need to first determine if you are in a “winner take all” market or not. Many niches will really only support one (or at best a tiny number) of winners. Think Ebay, Uber and Amazon. If you are in such a market, then you generally need to gather as much money as fast as possible and turn those dollars into market share.
If you are not in a “winner take all” market, then you are often better off with bootstrapping. It doesn’t distract you with time spent on investors and it doesn’t give you alignment problems.
If you are in a space or there can be dozens of players, then you should probably be thinking of being a forty million to hundred million dollar acquisition rather than that unicorn or IPO.
Q: How can I evaluate if my company is able to dominate the market?
First the question is whether it is the type of market that will really be dominated by anyone. A market with strong network effects or great value to a single standard.
If there is not a huge advantage in everyone seeking one place to find a service, then it is probably not a market that will be dominated, it is probably not in a “winner takes all” market.
We look at things like education platforms, there can be 100s of successful companies in that field because there wouldn’t be an intrinsic advantage in just restricting it to a monopoly. Perhaps even multiple Unicorns in a single market.
Back in the day, when phones were connected to wires, there used to be an advantage to having only one unicorn phone company in the region because running two or more sets of cables was not necessary. We used the term “natural monopoly” back then.
If you are in such a market, often will not be chosen on technical excellence so much as the best customer acquisition. Often that means best funded. Sometimes it can be achieved by starting from a niche and expanding, sometimes through generating incredible customer loyalty, sometimes its a land rush and it is just a question of being their first.
If you don’t have a way to be better at customer acquisition, you won’t be the dominant player.
Q: How would you describe the process of presenting to angels?
Typically, there are three stages in a presentation or to get to a presentation,
Doesn’t look right
Tell me more, and
Conditional yes.
As we get through any talk, we have to go and get past the initial no-sayers. These no-sayers can be gatekeeps who introduce you to new people or people who potentially decide where you go. If you can’t pass the no-sayers, you won’t get anywhere. The no-sayers see something “obviously wrong” and give up on you. It may be that he misunderstood something, he may be misinformed; you’ll never know.
Then comes the interest, where the things you say capture someone’s attention and it intrigues them enough to ask for more details. This second stage is called the big hook stage.
In the third stage, known as the conditional yes, you need to give them answers that are good enough to show that you understand the world well enough and are worth talking to. Not long answers for them to be sure you are right, not good enough.
Unfortunately, the typical angel pitch only deals with the second of these 3 skippings the answer to the obvious objections and showing insight into the meat of the problem.
Q: In your view, what’s the most valuable asset for a startup? Team? Technology? Solution?
The most important asset of a startup is their knowledge of the customer. Knowing the customer, understanding their wants and needs and catering to that is what determines who succeeds and who doesn’t. This alone removes a lot of risk. The sweet spot for an angel investor is right after they have proven that there will be customers and that these customers do not have better choices than this company. The solutions need to be surprisingly good, to the point where people would say it is fact better than doing nothing.
Communication that shows personal reliability is also very important. When making connections, it is important to show the potential investors your commitment to your idea and project. When you tell someone that by 6 weeks you will have X done, then by 6 weeks you should show them that X is done. This is the only way to ensure investments based on showing them that you have realistic achievements alongside the ability to listen and take advice to execute things at best. By doing so, investors will start reaching out to you before you even seek investments.
Everyone says Team and Traction. The earlier you are the more important the team is as it is almost all they have together. A big part of the value of traction is that it shows you know the customer.
Q: Given angel investors get diluted over time, what should be the promise of return to them?
Angel investors are usually the second set of investors, coming after family and friends. Most of the angels think that they will not be able to take on unicorn investments because the “winner take all” market would not allow it. Many angel investors look for realistic 10X rather than optimistic high risk 100x. They can invest in things that “wouldn’t move the needle” for a large fund.
Q: How does valuation work?
Angel investors rarely consider an uncapped note, almost never. If I think a company has a 10 million dollar valuation then I expect a 10 million dollar cap. Usually, it comes out at a 20% discount plus the cap.
Angel investors are expecting convertible notes or SAFE’s. The SAFE’s are generally a better choice for everyone; though the older investors may be uncomfortable with them.
Variants of the Berkus method are plausible for valuations below 2.5 million for pre-revenue companies.
Appeals to similarities to other companies is common.
But mainly it is the wild west with little rhyme or reason.
Q: There is always talk of traction for startups, even for the MVPs. On the other side, when there is an MVP, some funds can help to prove real traction. How do we resolve that conflict? It’s like a chicken and egg problem.
For most companies there are three groups of adopters.
The early adopters are almost like testers that put up with problems and they don’t count as much.
The second group is referrals, we them because we have personal relationships with them and often they’re big names that can become reference accounts, but getting adopters this way also is not scalable.
The third group would be customers that come from marketing through ads or news or whatever method we will use at scale to get customers. The only traction that counts is this last one. It should be measurable, repeatable, and can guarantee that more money spent will bring more customers.
On the other hand, if you are a component supplier to something that is (or is known that it will be) in large scale use, a single customer be all that your company ever needs. Here you need a metric of how such a company will choose you as a supplier. Basically, a test that can be run. Your traction is the rate at which such companies agree to such tests.
Q: How to know when it's time to seek funding?
Until you have a group of customers / customer surrogates that says that whatever betterness you offer is something they are in need of and willing to buy, then it is too early for you.
Endorsements from actual customers are wonderful but more than you need.
And of course, you have to believe that time is better spent in fundraising than in further development or customer acquisition.
Q: Do you care about the use of funds?
I need to know what milestones I can measure you against.
I like dollars going into marketing or sales
Money for development sounds risky. Enhancement of a work product is less scary.
I need a timeline with milestones. Generally I will write off anyone that doesn’t volunteer on
Q: Is there a criteria that you have to judge the soft skills of startups?
First and foremost good follow-through / good follow up. Right behind that is kindness and good listening skills. Finally willingness to update their beliefs on the basis of evidence.
Q: How much do you get involved with companies after angel investments?
The most valuable thing angels can bring is introductions. Customers. Supplies. Publicist. Staff. Everyone and everything. And sometimes advice (which is most often the form of an introduction).
Q: How often do you expect startups to send investors updates?
The best practice is to send a monthly one-page summary including progress, setbacks and what type of help might be useful. Short simple textual emails without attachments.
