What Happens to Angel Investors When the Big Money Comes In

Conventional wisdom says startups should begin their funding process with friends and family, then raise an “angel round” before grabbing serious venture capital. However, crunched between the interests of the founders and the venture capitalists with only a thin slice of equity, investing in the angel round rarely leads to good outcomes and is best avoided.

If everything goes perfectly, the angel round has huge upside for investors. The company’s valuation should continue to grow round after round so that even while angel investors are diluted by later capital, the value of their shares continues to increase. …

Unleash the power of storytelling to draw investors into your world

Storytime for Investors

Imagine you’re the CEO of a startup with an important new product. You’ve developed a device to create an instant communications network after a disaster. The prototype works great and users are excited; now you need investment to produce the devices. You’re in a room filled with investors, but they don’t even understand the difference between 5G and wi-fi.

So you start to explain — cells towers can take weeks to fix so you’ve developed a temporary replacement. As you move to the next slide you look up at your audience. Half the room is chatting with each other; the…

Here’s why you shouldn’t change your business plan to meet venture funding models

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When I went through YC Startup School, their advice often made me angry. Their attitude is that the only way to build a business is to go big or go home, and that infused everything they taught. If you’re building a unicorn, their advice was usually right. For everyone else, it’s wrong. Which wouldn’t bother me so much if their attitude wasn’t that unless your startup is shooting for the moon, go back to working at Starbucks. As my previous article outlined, there’s many ways to fund a great business besides venture capital. …

How do you build a startup if you can’t get venture funding? Learn how to fund a profitable startup under $25 million.

Photo by Brian McGowan on Unsplash

This is my 18th article on startup funding and my most important. Because somewhere around 2/3 of the startups I work with are building businesses that aren’t suitable for venture investment.

The venture model is simple — investors put in cash in exchange for a cut of the payout when the company is acquired or goes public. Since venture investors get nothing until the exit, no surprise that’s their only goal. And since startups are valued by revenues and revenue growth rates, accepting venture investor money is a promise to focus exclusively on explosive revenue growth.

This venture model works…

Hurdling Over the $25 Million Minimum

In an earlier article, I mentioned that startups need projected revenues of at least $25 million by Year 5 for angels to consider investing. This article explains the reasons for this seemingly arbitrary requirement.

Like everything else in venture financing, it all comes down to the exit. Until the company is acquired or completes an IPO, the investment has no actual value. It generates no interest, no dividends, no royalties, no rent. That million dollars an investor handed you is nothing but a number on a spreadsheet. Legally, the investor owns a fraction of the business, but since she gets…

Every day, I get a dozen messages on LinkedIn that say: “Hey Palter — I’m the founder of a great startup building an incredible app and looking for angel investors for our pre-seed round. Want to see our deck?” Sorry kids (and elderkids), but that isn’t going to work.

Without a doubt, pre-seed is the toughest round of fundraising. Finding investors is challenging and your valuation will be low. If there’s any way you can bootstrap through this stage, do so. …

What’s My Valuation?

The most common question I hear from founders is: “How do I calculate the valuation of my startup?” Ah, if it was only as easy as putting numbers in a spreadsheet like they teach in business school.

The number 1 reason you will or won’t get funded is your valuation — most challenges of your current situation: not enough traction, a skeletal team, too small a market, can be compensated with a lower valuation; conversely, too high a valuation can turn a great business into a bad investment. So what valuation is right?

Theoretical models like discounted cash flow, replacement…

The first rule of sales is to conclude your presentation with the ask — buy my product, hire my company, give us a chance — it’ll be the best decision you ever make. Every web page has a call to action at the bottom, and usually at the top, too, and in an annoying pop-up: buy our product, sign-up for our newsletter, download your free trial. So why do most pitches end with a wimpy “thank you for your time”? Come on, people. Never forget — your pitch is a sales pitch but instead of selling products, you’re selling equity…

How Does the Investor Make a Return?

How Does an Investor Made a Return on Investing in Your Startup?

Let’s say I’m a real estate developer and I’m offering you a deal: if you pay me $2 million, I’ll buy a plot of land, build a big house, sell it for $3 million, and split the $1 million profit with you. Sounds like a great opportunity, don’t you think? But you’d have a lot of questions to evaluate the investment before plunking down big bricks of cash: how big will the house be, how long will it take to build, and how much have other houses in the area sold for? Common sense, really. You want to make sure…

Hockey Stick Revenue Projections

For a pre-revenue or early revenue company, even 1-year revenue projections are pure fantasy. Demanding to see 5-year revenue projections seems perverse. No company in the entire history of the universe has ever come within telescope view their 5-year projections. They’re completely useless, and yet, absolutely necessary.

When someone sends me a pitch deck, I turn straight to the 5-year revenue projections. When we’re in the Q&A session at the end of a pitch to an angel group, it’s not the product slide or the team slide or even the critical traction slide that ends up on the screen but…

DC Palter

Entrepreneur, angel investor, writer, and sake snob. Author of the series on pitching your startup to angel investors at https://pitchingangels.com.

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