dollar-symbolsWhat exactly is an angel investor and would they consider investing in my pet company? In furthering my quest to clear up the myths and realities behind raising growth capital, I was fortunate enough to snag an interview with Peter Adams, one of the angel investment communities’ most knowledgeable ambassadors.   Peter’s pedigree is nothing short of impressive! He is co-author of Venture Capital for Dummies and serves as the Executive Director of the Rockies Venture Club, the longest running angel investing group in the U.S. He also runs the Rockies Venture Fund, an early stage venture capital fund and is an Adjunct Professor at Colorado State University.

Given your years of experience in this field, what is YOUR definition of an Angel Investor?

 I think the definition of angel investor has changed over time. The first angels were people who would invest in impossibly risky companies, often because they were related to the entrepreneur or because the business was meaningful to them in some way.

Now, there are perhaps three characteristics that distinguish angel investors from other types of investors:

Accredited Investor: Net worth of $1 million or more excluding your primary residence, or income of $200,000 or more (or $300,000 for a married couple)

Angel Deals: To be an angel investor, you need to be investing in angel deals vs. later stage stocks or funds. Angel deals are characterized by being fairly new companies (usually under five years), low or no revenue, valuations between $1.5 million and $3 million, and total investment between $250K and $2 million. Angel deals are later stage than friends and family “seed” investments and earlier than a Series A Venture Capital investment.

Contributes more than just capital: Angel investors contribute a lot more to the deal than just capital. They are often advising, serving on boards, making introductions and otherwise guiding the entrepreneurs towards success.

 Can you name some characteristics of a company that would make it appealing to an Angel investor? What types of companies attract Angel money?

 Overall, clarity of strategy is particularly attractive. Companies who have considered alternatives and who have built a formal strategy do way better than those who wing it.

The main characteristics of the company that we look for are a great team with experienced leaders, ideally with experience in venture-backed businesses that operate faster than non-venture businesses and with fewer resources.

Next, we would look for someone who is in a large and growing market with lots of opportunity for growth and with bigger players capable of making an acquisition when the time is right.

A great product that isn’t just an incremental improvement is important. It’s hard to break into distribution when all you’ve got is another “me too” product. Patents should be applied for prior to seeking funding as well.

Go to market strategy is missing from many company pitches. When you consider that the NUMBER ONE reason for failure in startups is failure to get customers, you would think more companies would develop sophisticated go-to -market strategies with multiple channels, partners, and a strong understanding of metrics.

Finally, the number one question investors have is “how will I get my money back?” Entrepreneurs and many accelerators seem to think that this is not an important question. I often quote from the second habit in The Seven Habits of Highly Successful People which states “begin with the end in mind”. The first thing a startup should do is to think about its exit, and understand how they can create value for their future M&A partner. By focusing on creating value for a future acquirer, they will create wealth for themselves and their investors.

 How does a start-up entrepreneur know how to value his/her company?

 Valuation is challenging for angel investments and some people just throw their hands up and say it can’t be done. They’re wrong! Valuation is not a simple or intuitive process and its best to take some time to do the research and find best practices. I personally use 4-5 different valuation methodologies on each deal I do. The reason for doing different methodologies is that each method has its own uncertainties, but by doing several methods you attack the problem from lots of different directions and overall come up with a valuation zone that is relatively solid. Some valuation methods involve modeling exit values and then working a discount back from that in a sort of modified discounted cash flows model. Others discount based on risks and milestones to be accomplished. Others work by comparing valuations of other deals being done in a market pricing methodology that compares factors such as team, opportunity size, product, competition, etc. After you’ve done all the different methods, you work out an average and standard deviation to calculate a zone in which negotiation occurs.

 How do valuation multiples differ between Angel investors, VC’s and Private Equity?

 This is a great question because I once had an entrepreneur tell me that he didn’t want to have any revenues because he knew that investors would just value the company based on a multiple of his small first revenues. He thought that having no revenues was better than having a little. This is crazy, of course, but I understand how he came to this belief. He didn’t understand the fundamental differences between how angels, VCs, private equity and later, M&A valuations work. Since most startups have little or no revenues or EBITDA, the two most common baselines for multiples, they have to find other methods. But, once the company is more established, then VCs and especially private equity firms will use valuation multiples based on EBITDA or revenue. The multiples will vary depending on the industry and the difference between financial and strategic investments.

 What advice would you give an entrepreneur looking to raise Angel Investment Capital?

Do your homework. The main reason companies don’t get funded is that they’re not ready. Angel investment has a whole language and process all its own and it doesn’t make sense to go in to it without understanding the rules. A company that is ready to pitch should have a solid exit strategy with a strong set of comparables, a financial plan that outlines future rounds of funding, a strategic plan, a detailed and believable pro-forma, a written valuation model, an executive summary and a great pitch deck.

 What services does Rockies Venture Club offer entrepreneurs and investors?

The Rockies Venture Club, a non-profit organization founded in 1985, is the country’s oldest angel investing group. RVC offers a lot to investors and entrepreneurs alike:

Education: RVC has a curriculum of classes and workshops for angels and entrepreneurs that cover all the basics from how to pitch to due diligence, valuation, exit strategies, and pro-formas. We also hold mastermind groups to coach entrepreneurs through the process.

Events: RVC holds three major conferences and nine monthly themed events throughout the year. These are focused on networking and making connections, content and great pitches.

Execution: At the end of the day, it’s all about execution and RVC coaches entrepreneurs and angels through the investment process, facilitates due diligence and negotiation and gets the deals done.

Carol Frank of Boulder, CO, is the founder of four companies in the pet industry and a Managing Director with MHT Midspan, a premier middle-market investment bank, where she specializes in M&A in the pet sector. She is also a principal at BirdsEye Consulting, the pet industry’s premier consulting group. BirdsEye advises in the areas of M&A, strategy, and licensing. She can be reached at birdseye@carolfrank.com.