Jeff Snellenburg, executive director of the Mid Atlantic Angel Group, recalls hearing a presentation by an entrepreneur hoping to attain the funds he needed to start a life sciences company. “I asked a simple question on how he came up with his valuation,” he recalls. In response, the entrepreneur flared up, angrily declaring that the investor had no right to question him. Basically, says Snellenburg, “he ripped me.”
The angry entrepreneur did not get any funding. No surprise there. But while his approach was clearly not tailored to make a favorable impression, much more even-tempered entrepreneurs also make mistakes that sink their chances of obtaining funding.
Snellenburg provides tips on avoiding missteps on the road to attaining angel funding when he speaks at NJEN’s 12th annual “Angel Investor Network” event on Wednesday, June 12, at 11:30 a.m. at the Princeton Marriott. Cost: $55. Register at www.njen.com.
Ten angel investor groups will be present at the event, moderated by Randy Harmon of the NJ Small Business Development Centers, where 15 start-ups will make pitches for funding. Angel groups in attendance include Innovation Garden, Jumpstart NJ Angel Network, Robin Hood Ventures, Delaware Crossing Investment Group, and Mid Atlantic Angel Group.
Snellenburg, a 1991 graduate of Shippensburg University who holds an MBA from Philadelphia University, has a background as a business owner. He took control of a Philadelphia-based family-owned security and fire protection not long after graduating from college. “My sister and I were fourth generation,” he says. His family also owned the former Snellenburg Department Store in center city Philadelphia. The experience of running a company, he says, is helpful in his work in angel funding. “I’ve seen both sides,” he says.
In addition to his work at the Mid Atlantic Angel Group, which has offices near the Philadelphia Naval Yard, he is a member of Delaware Crossing Investors, which has offices in Princeton and in Doylestown, Pennsylvania, and is president of the Pennsylvania Angel Network, a non-profit that supports 15 angel groups.
Angels are considered to be sophisticated investors who do not necessarily need all of the investor protections that the SEC mandates. Companies making pitches to them, for example, do not have to abide by all of the disclosure rules that apply when stock is being sold to the public. Snellenburg says that the SEC requires that angels have at least $1 million in assets, excluding a primary residence, or $250,000 in yearly income at least two years in a row — $300,000 if the investors are a married couple.
In an economy still cautious after a bruising recession, angel investment is even more important to entrepreneurs, says Snellenburg, who points out that venture funds, another source of cash, have been significantly less active in making investments. Angels are also typically more willing to invest in companies that are in early stages than are venture funds.
Asked if angels are ever shut out from investing in a particularly hot start-up, Snellenburg says that is sometimes the case, but not often. Generally, he says, multiple angel groups will work together. “There’s usually room for more than one,” he says. “A company will typically need $750,000 to $1.5 million. Each angel group will generally put in $100,000 to between $300,000 and $400,000.”
This money buys no guarantees, and angels know it. “It’s basically white collar gambling,” says Snellenburg. “The reality is that it isn’t for everybody. Four or five out of ten companies will fail.”
Start-ups that hope angels will take a chance on them must be prepared to make solid presentations. Some of Snellenburg’s tips for impressing angels include:
Network. Yes, this is advice that everyone in every sort of business hears again and again. It’s boring advice. But it works. One of the best ways to get the attention of an angel, says Snellenburg, is through a personal introduction. “It can be a friend of a friend,” he says. If you don’t happen to know anyone who is an angel, or who hangs out with angels, go to networking events — like the one NJEN is about to host — and meet some.
Beyond introductions, these events let you see what a good presentation looks like — and what a weak presentation looks like.
Do Your Homework. “Region is really important,” says Snellenburg. Angels generally work alongside the companies they fund, often taking an active role in early business decisions. So a company whose website states that it invests in New Jersey and Pennsylvania companies might possibly stretch to Delaware for an exceptional opportunity, but is not going to be interested in an Oregon or Alabama start-up.
Know where likely angels invest and in what they invest. Each group will have experts in only a few fields and will be unlikely to make investments outside of those fields. Pitching a robotics company to groups that clearly state that they invest in cloud computing and social networking companies is a waste of time. What’s more, it shows a lack of very basic research skills.
Be coachable. Snellenburg repeats this several times. “We see scientists and engineers with great ideas,” he says. What they often lack is business experience. That can be fine — if they’re willing to accept help in developing the team and the skills necessary to build a business.
Angels tend to be good at helping start-ups find executives, put accounting systems in place, and develop marketing strategies. But the start-up’s founders must be willing to listen to this advice and must show their collaborative side during presentations.
Don’t take too much money. “We have start-ups who come to us and say they need $5 million when they don’t even have a product yet,” Snellenburg says. “I see that all the time. Raise what you need for that period of time. Maybe only $500,000. You’ll get a higher valuation later.”
Taking more money means giving away a larger stake in the company. That can be a mistake and is a red flag for early stage investors. “We want management to stay,” he says, “not give up so much that they leave.”
Look for smart money. “Don’t just look for money,” says Snellenburg. “Look for smart money. Look for expertise around the table. You might see someone who could be on the board.” Angel investor groups are so much more than banks. The right group could provide the guidance that would make the difference between success and failure.
And remember, says Snellenburg, “it’s a two-way interview, and it should be.” As the angels are sizing you up, you need to be sizing them up. Do they have the skills you need? What about the personalities of the people who will be advising you? Are these people you will enjoy having around in the stressful days when you build and launch your business?
Know how the story ends. One of the biggest challenges angel investor groups are facing now, says Snellenburg, is “getting a return on investment.” They are looking for entrepreneurs with a clear exit plan that will provide them with a profit — not the sort of extravagant payoffs that were common before the Internet bubble burst, but something solid. “We’re not looking for a home run,” says Snellenburg. “We’d like to make $20, $30, $40 million. Obviously we still want a home run, but..”
So, entrepreneurs don’t have to promise a $1 billion IPO, but to win funding from angels they need to have a good of idea of what the market for their company will be in eight or ten years. They need to provide plausible scenarios detailing, for example, what larger companies might acquire them and for how much.
Be prepared. Never be casual about presenting to angel groups. Have your management lined up, know what holes you still have to fill, make sure a lawyer and an accountant have gone over your financials and your business plan, and be ready to confidently answer any question that might come up. There is so much competition for angel funding, and, Snellenburg stresses, “You only have one chance.”
Then, he amends, but only slightly: “Maybe two.”