How to Close Angel Investors

How to Kill the Angel Investor "Deal-Killers"

Have you experienced the frustration of dealing with a self-proclaimed "interested" angel investor who you just cannot close, no matter how hard you try or how many months go by? If you have, read on.

After writing last month about angel investment "Deal-Killers," I received a slew of emails and calls from frustrated and angry entrepreneurs unable to close deals with angel investors. Many of  them had invested more than a few months talking to investors who had repeatedly expressed a commitment to invest. Yet every attempt at closing the deal had ended in frustration. Some of the angel investors finally expressed a reluctance to invest at this time while others have just dragged their heels and avoided the subject. Either way, the result is the same. The frustrated entrepreneur can't get the money he or she desperately needs for their company.

As pointed out in the previous post, the resistance often stems from the angel investor's uncertainty over how they will get their money back plus any profit that may have accrued. To be honest, their fears are warranted. Minority shareholders in a small private company (i.e., a chronically cash-strapped one) are at the mercy of the majority who can easily find a hundred better uses for limited capital than buying out investors--especially the passive variety. Both sides always have a convincing rationale. The minority investor feels that it's time he was finally rewarded for taking a gamble on the company at an early stage. Meanwhile the majority are convinced that if they just hold onto that money for another six or twelve months, it will allow the company to hit a new plateau which will insure its long-term success.

Who is right? Probably both sides to a degree.

With this problem in mind, I developed a tool for raising money that addresses the concerns that all angel investors have about investing. Indeed, it tackles them head on. In a nutshell, How Deal-makers Close Investors demolishes the big deal-killers:

-The inability of investor and founder to bridge the valuation gap.

-The investor uncertainty over the chances of a profitable liquidity event occuring.

-The investorss fears that majority shareholders will run roughshod over him.

Closing Angel Investors With Revenue Royalty Certificates (RRC)

Revenue-based financing is finally emerging from the shadows and I have been one of its pioneers.  This product consists of a book in pdf and an accompanying spreadsheet in Excel. Contained within the package is all the knowledge you need to be able to utilize this innovative financing instrument to close the deal with angel investors. The instrument, called a Revenue Royalty Certificate (RRC) or Revenue Participation Certificate, is an off balance sheet loan which clearly demonstrates to the investor how and when they will recover both their principal and profit while also potentially receiving an equity stake in the company.

However, the RRC is not just about benefits for the investor. This instruments also offers substantial benefits to the entrepreneur. I am referring to freedom and autonomy here. With an RRC, the investor is unlikely to interfere with your management style as long as the payments are being made on time. The RRC is a win-win for both parties.

There are a few more bonus lessons contained within which reveal how sophisticated financiers select their target investors and do deals.

Get more information on how you can raise capital with a Revenue Royalty Certificate.

Do yourself a favor and stop spinning your wheels trying to do it the wrong way.

Space I can recover. Time, never. - Napoleon Bonaparte

Comments

[Garreth]

Will this work for a pure service business?

[Umair Sada]

Here's another question...can this work with venture capitalists...or is it just for angel investors?

[FG]

Peter, I just finished it and found it very helpful. Is there any way to purchase an hour of your time to discuss a related issue?

[Peter]

To answer your questions:

1. Yes, it will work with service businesses.

2. Venture capitalists have their own way of structuring deals, so this instrument won't help you with them. It's for angel and business investors.

[Daniel Weinreb]

I'm a member of Common Angels, a relatively experienced and large angel investment group in Boston.

I agree that it's awful when investors drag their heels and don't really give you a "no" when that's what they really think. Common Angels has three full-time staff members: two executive directors plus an administrator. The executive directors are very professional and get back to everyone promptly. (I.e., not all angels groups are the same.)

I've never heard of the kind of deal structure you seem to be talking about. Why should the company pay back the investors monthly, like a mortgage? The whole point of that money is to provide working capital for the company, so it can grow. If you want to give them less money, do that from the start.

But I have not read your pamphlet so of course I am in no position to make serious comments on it.

[Peter Ireland]

Daniel,

The instrument, called a Revenue Royalty Certificate (RRC), is a loan structure which clearly demonstrates to the investor how and when they will recover both their principal and profit while also receiving an equity stake in the company. It's a hybrid instrument combining both debt and equity.

It provides capital to a company for a pre-agreed upon time period which can stretch anywhere from months to years. On top of that, it's highly flexible meaning that it can be customized to meet the needs of both parties.

RRCs have been used for decades because they solve the problem of, "How and when will I get my money back?"

[Nandu Marketkar]

Hi,
I've been Angel investor with my partners for several years and have successfuly invested and done it in a timely manner. I have 2 points to make: One about you RRC proposal and Second about what type of Angel investor any entrepreneur should form a relationship with.

First let me talk about the second point. The Angel investor of choice should be one who is with enough savvy as an investor, not just greed! Don't confuse investor greed with savvy. Any investor who wants to get in at an early stage is taking a big gample, of course, but also must realize that as soon as he/she is in with the investment, he is part of the venture in many ways. He now has to facilitate next round of funding when it is necessary, not be an obstacle!! So any terms that hinder the future finacing deals that the investor demands is not worth having! It is a bad "money" to have. We have been early stage investors in most cases and also commited to 1st, 2nd round financing as well. So DO NOT GO WITH AN INVESTOR WHO JUST WANTS TO GO IN FOR SEED ROUND OF FINANCING. Then you must tell the investor that the next round investors will also get A shares if required and he has to go along with it. This is just a small sample of many issues that must be considered. Anyway, you dont want an investor who has limited resources to be a seed investor because he could hamper your future rounds big time!!!

Now about 1st point. Why do I want to give an investor Revenue Royalty Certificates? The money that he put in is for use as part of the operation, not make him feel good and comfortable about the investment. It is his job to do proper DD and then make investment, "jump in with both feet, not just dip his toe in the water". I wouldn't want this kind of investor at all. Plus the loan screws up the balance sheet big time. Why do I want to do that? I want to show some equity in the company, not debt. So I respectfully say that RRC is not a good idea. Sorry!

[Cam Johnson]

Royalties are off-balanace sheet items.

[Peter]

Nandu, see Cam's reply.

[Richard]

I believe you need to consider the type of business needing the capital, and the needs of the potential provider of funding. If the business is high tech with a great product, the odds are in favor of straight equity. However, some startups don't have the great product and offer little prospect of a big return. So, an off-balance sheet debt financing may be useful.