Five tips for negotiating angel financing:
KNOW YOUR STUFF: Investors want to see someone who has a track record of success, has put together a thorough business plan, can easily and quickly respond to questions, and has done the legwork with potential suppliers, distributors and customers to know that their plans are realistic. "At the end of the day, you're asking someone for their money. They need to have confidence in the management team," says Iain Klugman, president and CEO of Communitech Inc., a Waterloo, Ont., not-for-profit organization that advises and assists technology startups.
BE REASONABLE: Some of the biggest mistakes entrepreneurs make is overestimating their market penetration, underplaying potential barriers to the market and competition, and expecting to earn too much money for themselves. "[Investors]tend to be able to spot the snake-oil salesmen," Mr. Klugman says.
STAY LEAN: While some entrepreneurs might be tempted to hire a significant staff and spend aggressively on marketing in an attempt to make a big splash on their launch, angel investor David Ceolin prefers a lean startup plan in which spending is pared to the bone. The leanness of the operation and business plan mitigates the risk to the investor's money, he says.
GET AN ADVISORY BOARD: Jeff Anders, CEO of Internet news startup TheMarkNews.com, suggests that before startups pursue investors, they should pull together an advisory board of well-connected, well-respected people who understand their industry and their needs. "They don't have to be investors," he says. Their mere presence will improve your understanding of what you need to do and will open doors with key potential investors.
GET AN "ANCHOR:" Mr. Anders recommends entrepreneurs focus on bringing on board a well-known angel investor who has expertise in your market. It immediately adds to the credibility of your venture and opens doors with other investors and industry insiders. "After that, everything gets easier."