Marjorie Radlo-Zandi
More posts from Marjorie Radlo-Zandi
In more than two decades as an angel investor and early-stage company scout, I’ve met with hundreds of entrepreneurs seeking funds and sat through an equal number of slide deck pitches.
You could say I’ve seen it all. From my point of view as an angel investor and former entrepreneur, here are five essential factors I look for when considering my next investment.
Offer a game-changer that stands out
To attract the right angel investor, make sure to present a compelling technology or product offering that solves a critical customer problem. Be sure to showcase your unique competitive advantage — an incremental improvement over the competition is not a winning formula for attracting investment.
Include key market metrics such as TAM, SAM and SOM. TAM (total addressable market) is the total revenue possible if a product or service were to achieve 100% market share. TAM answers the question of who would theoretically buy your product or service. It describes the total revenues a company could make if it had an all-encompassing monopoly with total market share for its product or service.
The TAM for the non-alcoholic beverage category, among the many categories where I invest, takes in the total worldwide non-alcoholic beverage market, looks at all revenues from beverage purchases, imagines sales in all countries in the world, and assumes no competition except tap water. SAM (service addressable market) is the TAM segment within geographical reach that you can target with your products or services. Lastly, SOM would be the share of the market that a company could capture over time.
Present solid financials
When presenting to angels, it’s critical to show proof of concept, traction with regards product/service development, and revenues. Knowing your company’s financial condition and presenting your numbers to investors is paramount, as is making sure the past and current numbers you present are accurate.
Investors want to see top line, gross margin and net profit margin. Don’t be tempted to overstate or hide trouble spots; it’s a huge red flag that investors will see through, sinking your prospects of attaining investment.
Case in point: Two venture capital groups recently pulled out of a game-changing SaaS company investment because the founder radically inflated financials and misrepresented the product development stage.
Have a realistic five-year projection that includes profit and loss – a mid-level projection that isn’t too optimistic or too conservative is best. These financial projections give investors a look into the future of your business sales, cost of goods, operating expenses and bottom line income. They become a collection of estimations and forecasts that give a data-backed view of your company’s financial future.
I invest in companies in the beverage space; for this market, a mid-level top-line revenue estimate would be $250,000 in year one, $500,000 year two, $1,500,000 in year three, $3,000,000 in year four, and $6,000,000 in year five.
I have seen too many unrealistically high projections. An extraordinarily high projection signals you’re not altogether credible, and I advise you to avoid this mistake at all costs.
One company that pitched me showed $100,000 in sales in year one, $10,000,000 in year two, and $100,000,000 in year three. Although theoretically possible, achieving these numbers would be highly unlikely. Then there are extremely conservative entrepreneurs who want to be 1,000% sure. This approach is also unrealistic, and their improbably low projections generally fail to attract investors.
Create top-down and bottom-up forecasts
There are two different types of forecasts: top-down and bottom-up. The best forecasts combine both approaches. A top-down forecast is calculated by estimating the TAM and SAM for your product, then estimating your market share over time.
A bottom-up forecast is calculated by estimating expected and potential sales. Consider how quickly and at what rate you’ll obtain market share, how much competition you anticipate, and the challenges the competition is likely to pose. This includes whether you have a game-changing product that customers will rapidly switch to, or whether customers delay switching to your product as they consider other options. The answers are integral to the sales cycle, along with the percentage close rate you anticipate.
As you create your forecast, be sure to reach out to board members and advisers — many will have been through similar calculations with their own companies and can bring valuable, seasoned perspectives about how to create a mid-level forecast.
Demonstrate sample exits in your space
Switch your mindset from entrepreneur to investor and see your company through a different lens.
Imagine for a moment you’re a financial investor evaluating your company. How would you view it? Looking at your business from the investor perspective is somewhat analogous to evaluating a range of investment products, funds, and stocks or bonds for potential risk and returns.
Prospective investors may take a similar stance to assess your company: They’re looking for potential risk and returns. They see slide decks with exit plans from hundreds of companies each year; risk and return are frequently their primary criteria for selecting which companies to invest in. Understand that investors expect a return, and investment paybacks in the overwhelming majority of cases require an exit that benefits your investors, you and your team.
As you think about your exit strategy, spend time researching and understanding similar companies in your space that have recently sold. When you speak with potential investors, make sure to highlight these examples so investors can imagine their return. Predicted return will vary depending on the type of company you run, but often is X times sales or X times earnings before interest, taxes, depreciation and amortization (EBITDA).
It pays to do your homework. Pitchbook, Google Alerts and data from investment banks are just a few sources for uncovering this information.
For example, one of my investments in the AI/machine learning space showed comparable exits within the last 18 months – most exits were 8x to 10x revenues. Some were even higher. The encouraging comparables reassured investors that a high return at exit would be more likely compared to the risk of investing.
Present a realistic valuation
Investors invest for an expected return, which they’ll receive only if the value of your company at exit exceeds post-money valuation (value of the company after investment).
If you’re in a typical seed or Series A preferred stock financing with a pre-money valuation of $10 million (value of the company before investment), you could be looking to raise $10 million. If an investor puts in $10 million, the company’s post-money valuation is $20 million. In this scenario, the exit value you anticipate needs to be much greater than the post-money valuation for an investor to see your company as an attractive investment.
As a founder, be sure to include a slide near the end of your pitch deck that describes all facets of the proposed financing. In the case of a priced round, show how much money you’re planning to raise, pre- and post-money valuations, how the money will be used and the exit value.
I have seen many terrific companies not get the traction they deserve due to an unrealistically high valuation. For example, one company I met with had five employees, no patent issued, and a pre-money valuation of $65 million with $250,000 in ARR (annual recurring revenues). This unrealistic type of valuation usually doesn’t hold water and investors won’t consider funding such an early-stage company.
Founders have a tendency to peg a much higher valuation to their company in a good economy. Resist the temptation! Investors know good economic trends are cyclical. They also know the environment may not be so favorable when your company exits, which will cause its valuation to be considerably lower.
I can’t emphasize enough that investors don’t want to invest in a company whose valuation appears inflated, because they know they’re unlikely to get a return. Simply put: Don’t count on the boom times being there when you exit.
To attract angel funds, remember to think like an investor and adopt the investor’s mindset: They need to profit from investing in your venture with minimum risk. Make sure your product is an outstanding new offering with promising market share and solid financial estimates. When you show valuations and exits of similar companies, you’re giving investors the opportunity to see their potential exits with your company.
Another point to remember: Not all investors know your company’s marketplace. Be considerate of each investor’s questions and show both knowledge and humility when you speak. Be meticulously prepared when you pitch and anticipate questions. Your goal is to give sufficient detail yet keep your response on the short side.
By showing how the valuations work for you as the entrepreneur and for the investor, you’ll ensure your mutual interests are aligned and you’ll be more likely to attract investors into funding your endeavor.
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