The 3-step girl’s guide to angel investment
By Lynda Decker September 5, 2016
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The 3-step girl’s guide to angel investment
By Lynda Decker September 5, 2016
The 3-step girl’s guide to angel investment
By Lynda Decker September 5, 2016
Header Image

“The capital markets are dominated by men,” said Deborah Jackson, founder of Plum Alley, a crowd-funding site for female entrepreneurs. “If you look at the statistics around the flow of angel and venture capital funding, less than five percent is going to female-founded companies. That means 95 percent of capital is going to male-funded companies.”

I recently interviewed Jackson as I began my research for this article for AIGA on angel investing. I soon realized that while I could easily Google organizations that are focused on assisting female entrepreneurs, I simply did not understand the big picture.

Jackson is down to earth, funny, and charismatic—and the perfect individual to explain the complexities of how ideas become businesses and why capital is so important for those businesses to succeed. What are the capital markets and how do they work? And, why should I care?

Women have great ideas, but as Jackson told me, the big issue is that the capital (a.k.a. the money) to bring those great ideas to the marketplace is mainly controlled by men. And those men tend to invest in ventures and people they can relate to, people much like themselves, namely other men. It’s a serious problem because access to that money is access to opportunity and success. I asked Jackson to walk me through the process.

Step one: getting started

A former investment banker at Goldman Sachs, Jackson has a blazing intelligence and firsthand knowledge of the obstacles women face. “Raising capital happens in stages,” she said. “If you’re in an early stage and just starting out, you need proof of concept. That is, you prove that people are willing pay for your idea. So you first go into your own pocket and come up with a little bit of money to create a prototype or a business plan. That’s the very beginning of the capital chain.

“But some people don’t have personal resources. In that case the next step is to go to friends and family. If that’s not an option or you’ve already done that, the next step in the capital-raising chain is to create a crowd-funding campaign that says, ‘I want to raise money, and here’s what I’m going to do with it.’ Then you create a compelling video, a story, a tagline, and upload a campaign onto a crowd-funding website.

“When you raise money on a rewards-based crowd-funding platform, people contribute money and get some type of reward in return. They don’t receive any equity in the company. For example, if the product is a film, their name is in the credits. People get something back, but it’s not equity in the company. Typically on any crowd-funding platform, 80 percent of the money that’s raised will come from people you know or your extended network.

“People give money in this case for three reasons: they know you, you asked them, and they like what you’re doing. The crowd-funding platform is valuable because you show that you can put a campaign together and that people will support your idea. It also shows you can ask for money.

“This is one of the biggest challenges for women—they have a hard time asking for money. Time and time again I see women who have a compelling product, put a great story together, but they just can’t ask their friends to fund their ideas. I can’t stress enough how critical it is to get up the courage to say, ‘This is important to me, please give me money.’”

Crowd-funding platforms are particularly vital for women because women don’t have the same access to capital as they move up the capital chain. So let’s assume your friends and family back your campaign. Then what?

Step two: angel investors

“After crowd funding, the next stage in the chain is the angel investor,” Jackson continued. “An angel investor is a high net worth individual or group of accredited investors who can give you money in return for equity in your company. It’s a much more serious process. Angel funds come from a community of people around you or from a club of angel investors.”

One example is Golden Seeds, an angel-investing club focused on female-founded companies. “They have a very specific screening process that involves going to their website and uploading information about your company/concept,” Jackson explained. “If you’re accepted, you come in and present to a group of investors. Probably less than two percent of all companies get funded. The amount of funding is limited, so if you’re going to be approaching Golden Seeds or any angel investor, there are a couple of things you have to demonstrate.

“First, you have to show that you actually have a product—you have a prototype or something that the group can actually kind of kick the tires of and see how it works.

“You must figure out your business model and your revenue model. How are you going to make money from your product? How much will people be willing to pay for it? Then you need to show how you can scale.

“Let’s say for example, you’ve created a product and identified a customer. The next issue to address is how you can make it a really big business. What’s your marketing plan? What’s your sales plan? What’s your roll-out strategy?

“Before approaching angel investors, you need to have that information in place and it needs to be compelling. You also need to assess the competitive landscape. When you think about your company and what you’re doing, what other products may you be competing against? You need to show the size of your market, too. Angel investors, as well as venture capitalists, like to invest in big opportunities. They want to see that what you’re doing represents a very, very big market.

“Angel investors are looking to invest in a company that will grow; they want it to have huge revenues and profitability so that they can get the specific return they’re looking for—three to five times the money they put in, in a time period of five to seven years. So if you receive $100,000, the investor will be looking for a return of $300,000-500,000 in three to five years.

And you have to present this all in five to seven minutes. “These people have seen the background material that you submitted online, so you don’t need to repeat all of that. What you need to do is convince them that you’re the right person, the right entrepreneur, that you totally know your business, that you’re the one that’s going to make it happen—and that no one else can do it as brilliantly as you can.”

Step three: Venture Capital

Lets say you got your investment, your business is booming, and you’ve paid your investors back. The next step, Jackson says, “is to acquire Venture Capital (VC), and that’s a very big deal.

“The good news about VC is that you can get a lot of information about it online. At CB Insights you can find the most active venture capitalists in every sector,” from tech to hospitality, consumer products, etc. Once you create a list of potential VCs, sort it by success.

“The top tier are the 10 VC firms that have invested in a lot of the big name companies, and it goes down from there. You should start pitching the lower tier firms, because they’ll be friendlier and more open. You’re going to have to make 50 calls and mostly you’re going to hear no.

“If you get an appointment, keep in mind that the VC’s business is to look at a lot of companies. Many times you’re invited because they want market intelligence; they want to know what’s out there. Maybe they’re looking at a competitor company. Just because you’re invited to come in and do a pitch doesn’t mean they’re really serious. It’s a process. Think of it as a version of applying to colleges or going for job interviews. You have to see many.

“You could hit a VC firm at the right time or the wrong time and might be turned down for reasons that have nothing to do with you or your company. You could present and find out that they’ve just done 10 investments in the last month and they’re going to take a breather. Or maybe they’ve invested in a company that’s close to what you do, so they don’t want any more exposure in that area. Part of the process is timing and luck, and you just have to have a thick skin. You have to tell yourself to ignore the no’s and go on and make the next call.

“The other thing to keep in mind is the balance of power. Often companies come in to VC’s and they’re intimidated. It’s as if these big money people are gods; they have so much power, they’re so smart. And they behave that way—it’s a weird dynamic. I think it’s better to keep in mind that VCs are in the business of investing in companies. They need you as much as you need them. If they don’t have good companies to invest in, they’re out of business. It’s a reciprocal relationship—and this is something that’s often difficult for female founders to reconcile. You have to believe that you have a company they need.”

Fast Company states that only 2.7 percent of all venture-backed companies have a woman CEO. That’s a mere 183 out of 6,517 companies, or $1.5 billion out of the $50.8 billion invested between 2011 and 2013. And women make up only six percent of the VC decision makers. Despite these bleak numbers, there are many women and men who are working to fix this disparity.

Resources

If you’re preparing a pitch to investors and need some help, there are a number of options.

Programs
For starters, there’s 10,000 Small Businesses, a program open to both men and women with a curricula designed by Babson College and funded by Goldman Sachs; the Tory Burch Foundation sponsors a portion of the program that’s female-only.

Accelerators vs. incubators
Accelerators take single-digit portions of equity in companies in return for small amounts of capital and mentorship. They’re generally truncated into a three to four month program at the end of which the start-ups “graduate.”

An incubator, on the other hand, brings in an external team to manage your idea and takes a much larger amount of equity compared to accelerators because they allow more time for the business to be successful. Women often have a difficult time participating in these programs because they require leaving families and traveling to the site of the accelerator/incubator for months or even years.

Crowd funding
In addition to Deborah Jackson’s company, Plum Alley, a crowd-funding site for women entrepreneurs, the number of female-focused angel investment groups may leave you breathless, but here are a few to get you started:

  • Astia is a not-for-profit organization that helps female entrepreneurs connect.
  • 37 Angels focuses on early stage start-ups.
  • 500 Startups is an angel investment firm based in Silicon Valley with a globally diverse group of investors and a portfolio with companies founded by over 100 women. 500 Startups also provides mentorship through an accelerator program.
  • The Pipeline Fellowship and Women’s Start-up Lab are two examples of the numerous organizations that look at both sides of the capital flow, training entrepreneurs as well as potential investors to identify opportunities. The Kaufman Fellows program is focused on investing and leadership development for both men and women established in their careers.

Every day, organizations are emerging to increase female access to opportunity. And while all of these efforts will ultimately pay off, change begins one individual business at a time. As Deborah Jackson would say, “People will support you, but you first have to ask them.”

Image courtesy of Owen Gatley.

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