Saturday, December 12, 2009
Myth - Entrepreneurs generally succeed in raising capital from angels who have no prior relationships with their companies based on the merits of their business plans. Mostly wrong. An angel investor invests primarily based on a prior relationship the angel investor has with the entrepreneur or with another angel who represents he or she will invest because of the merits of the deal and his or her established relationship with the company. The key for a company in raising capital from angel investors is to establish relationships with potential angel investors long before asking them to invest in your company. In other words, a precondition to starting a company which will need angel investment to get past the first year is to "prime the pump" so to speak in order to have a lead angel investor when the time comes to raise capital. Almost all entrepreneurial companies start with family and friends money, hoping to achieve a few milestones that will make the company attractive to angel investors for "just in time" capital from these investors. Inevitably, it takes much longer than contemplated to raise capital from angel investors and the company runs out of money. The reason for this is that entrepreneurs almost always underestimate how long it takes to raise capital from angel investors who are strangers. They wait too long to begin the process of establishing relationships with potential investors.