How to Raise an Angel Round

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How to Raise an Angel Round

The information on this page should not be construed as legal advice.

Whenever I went home to Rochester, New York to visit family while I was building SendHub, I would run into old friends or acquaintances at a restaurant, bar, or, better yet, Wegmans (the best supermarket ever). With Old Faithful-like certainty, they would ask me what I had been up to and I had to explain that I was building a startup. The next few words of these conversations were “I’ve got this great idea...” Fascinatingly, most my old friends or acquaintances had come up with some pretty good ideas. My immediate follow-up was “well, why is it just an idea?” The answer was almost always money - in amounts nearing a few hundred thousand dollars.

Many believe money is the limiting factor in turning an idea into reality, but money is only the limiting factor if the person who has the great idea believes that (1) he or she can only start a business after they have the three-hundred or so thousand dollars needed to get it off the ground, or (2) the money needed to build a business has to come from entirely his or her own bank account. The reality is that a business can gain a great deal of traction with a small amount of money that can come from multiple sources; i.e., investors.

Trust me, I know that not everyone can go off and raise a $1,000,000 seed round off the bat. However, it isn’t unrealistic to think that an entrepreneur could clunk together the $50,000 needed to launch a business that gains enough traction to later raise a $1,000,000 seed round. So if you “have a great idea” here are some steps that may help you raise a small round in order to start turning an idea into reality.

1. Figure Out Who Has Money AND Who Believes In YOU. This part probably starts months, if not years, before actually thinking about raising money. If you don’t have a ton of traction or revenue, who the heck wants to invest you? People who know and believe in you, that’s who! Emailing investors blindly without an intro is a pretty bad idea and mostly a waste of time. Sure, it may work one in a million times, but a person could probably spend their time more wisely by concentrating on building the business and relationships that may lead to investment later down the road.

2. Put together a DECENT pitch deck… not a business plan. When people ask for my advice on raising money, somewhat often they send me over a business plan. I’m surprised when the document arrives in my inbox because, for some reason, I thought a business plan would arrive by mail carrier in leather bounding. On the rare occasion that I received a pitch deck, I usually end up downloading a 30 page powerpoint that would take me two hours to fully digest, partially because I’m a slow reader and partially because the powerpoint reads like a business plan. DON’T DO THIS. Instead, look up Guy Kawasaki’s 10-20-30 rule, which is 10 years old, but which still has great principles. Also, find a good designer to help you build a pitch deck; preferably a designer who has built pitch decks in the past. Sketchdeck has some great options if you need help.

3. Take Care Of Corporate Formalities. First off, don’t make the mistake I did and form an LLC. Instead, form a Delaware C Corp. At a minimum, well executed and standard corporate formalities such as formation, equity issuance with standard vesting, written consents, etc., put an investor at ease and demonstrate how truly on top of your game you are. At a maximum, if your corporate formalities are somewhat sideways, an investor could balk.

4. Know Fundraising Structures. So this is your first fundraising rodeo and you’ve always heard of people selling equity in exchange for capital. Well, in most early stage companies, seasoned investors stay away from equity investment-it’s more complicated than other structures, it costs more to legally complete the transaction, and it doesn’t have some of the protections that angel investors have grown accustomed to. Take some time to read up on funding structures. Knowing about equity investment, convertible notes, and the YC SAFE.

5. The First Check Is The Most Important. Once you have a rich person who believes in you and writes you your very first check, you have found your first follower. This proof point is a signal immensely more important than you can imagine. Once a person says “sure, I’ll hand you a check even though there is a 99% chance I won’t ever see that money again” you’re much more likely to get a second person to write you a check. This is because that first person signaled that you are worth risking money over. If that first person writing you a check has a strong reputation, then that person’s check will help that much more.

6. Scarcity Creates Supply. When investors fear that they will miss out on the next Facebook, they write checks. If you are hoping to raise $1,000,000 and have $675,000 invested, stating that you’re raising $750,000 with $675,000 already invested will subconsciously tell the investor (a) that he is missing out if he or she doesn’t close the gap and (b) “it would be great if I were the person to close up this round!”

If you have further questions or would like to know more about this topic or my thoughts on it, please reach out! I’d love to discuss further fundraising strategies.