Introduction

The process for securing equity finance typically starts with ‘an introduction’ backed up by an executive summary or full business plan. Angel investors and venture capitalists are time pressed people inundated with requests from entrepreneurs looking for investment. Hence they are more likely to take an introduction seriously if it is a warm one i.e. via a trusted contact.

The business plan is essentially a road map where entrepreneurs document what investment they require, and how they intend to spend it via allocating resources so as to generate profits (from which the investment can be repaid in kind). While business plans have typically been associated with formal physical printed business plans, increasingly they exist as online documents. A short plan with a strong executive summary is highly preferable to something as inaccessible and as lengthy as James Joyce’s Ulysses (no matter how good the underlying premise may be). While business plans serve many purposes, they are vital for any new business seeking investment, as they are used to convey to prospective investors what the opportunity is, and the size of the addressable market (amongst other things).

Angel investment is generally required at a pre-revenue stage, and hence there is significant uncertainty, not least in terms of customer demand, but also in terms of whether the proposed offering is even commercially viable, or whether the right team is in place to take the opportunity through to profitability. The business plan is thus used as the means by which the investor can assess the credibility of the business model. For established businesses looking equity finance the past performance financial statements in the business plan will play an important part in demonstrating the business performance to date.

Finding Investors

The angel investment process described above is still very popular. However, this process had a number of drawbacks, not least in that it was both time-consuming and highly inefficient.  These investors will review a business plan and if they feel that the executive summary is sufficiently compelling they will then usually look to have the entrepreneur pitch to them. More often than not though they will pass (for a whole host of different reasons i.e. not an industry they are familiar with, the assumptions underlying the plan are not plausible etc).

 Modern variations of the angel investment process have consisted of everything from ‘speed pitching’ to ‘pitch events’ where numerous parties from both sides of the table interact, rather than the strict 1:1 interactions of pre-Internet days. 

The emergence of the Internet has meant that this matching process can now be undertaken in a much more efficient manner than before, and the network effect resulting from the growing number of groups serves to streamline the process even further and help increase the likelihood of a match between investors and entrepreneurs. In many ways, the process mirrors the growth of online dating sites such as Match.com in bringing different people together in pursuit of a common goal.  However, given the nature of the interaction is more than mere funding, the personal 1:1 relationship nature of angel investment will remain important, even if the initial ‘flirting’ takes place online. 

Finally, Rand Fishkin of SEOmoz gives an excellent ‘no holds barred’ account of his experiences of the funding process in his article SEOmoz’s Venture Capital Process.