How to Raise Money from Angel Investors and Venture Capitalists

Chapter 5 - Step 2: Apply
by Marshall Brain

Most angel groups and many VC firms have a web-based process for applications. Therefore, even if you have been recommended in, you will often be asked to fill out the application online so that you are "in the system". Especially in an angel group with 40 members or more, having the application in the system means that everyone in the group can see it and work on it easily. Many angel groups use a system called Gust to handle application intake.

You will fill out everything and upload your package of information, which might include your business plan, a description of the management team and a PowerPoint deck that you will use when presenting your company.

Once your application has been submitted, it will go through some kind of screening process. Angel groups especially can receive a lot of applications, and the screening committee will sort through them to find the appropriate companies.

Here is where you see the advantage of being recommended in. The screening process usually is shortened and may become a formality when you get recommended in by one on the group's members.

If you don't get recommended in, the screening committee is going to look at your application with the question, "Does this company seem to understand the investment process and fit our investment profile?" Here are some of the things that the committee will look at:

  • Does this company seem to be a "lifestyle company", or does it have a plan for growth and an exit? A lifestyle business is generally the kind of business that opens, grows to a certain size and then maintains that size, providing an income (and a lifestyle) for the owner. Lifestyle businesses are rejected. If there is no intent to grow rapidly and then exit, an investor generally is not interested.
  • Does the company match the profile of the type of company that the fund looks at? For example, if you are seeking funding for a seed-stage company in the technology sector, but the fund does mezzanine financing for life sciences companies, then your application will get rejected because it does not match the fund's objectives.
  • Does the company have a management team with experience, or at the very least the stated intention of hiring a management team with experience? The lack of an experienced management team can be a problem unless the company has a stellar track record.
  • Does the company show that it is properly managing its intellectual property? If the company depends on some new technology, the patents need to be taken care of.
  • Is the company operating in a large market? You should be able to show that the total market size for your company is big enough to support a new company and capture a sizable revenue stream. For example, imagine that you plan to open a new pizza chain with a revolutionary concept that will make it more popular than Papa Johns. And you have the test marketing to prove it. Americans spend $14 billion on pizza every year. If you capture 1% of the market, that is $140 million per year in revenue. That might be interesting to investors. Or imagine that you have designed a revolutionary new baby stroller and you can demonstrate that parents spend $500 million a year on strollers. If you capture 10% of the market, that's $50 million. That might be interesting to investors, although many may be skeptical of the 10% number without proof. But what if you have created a new framistatic defibrillator and the total sales of framistatic defibrillators averages $2 million per year. As a general rule, investors will not be interested. A $500 million market size is the lower end of what most investors consider.
There may be a phone screening process at this point as well. If your application passes all of the fund's tests, then the screening committee will recommend that your application moves forward. If not, you will receive a polite rejection letter.

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How to Make a Million Dollars

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