When Should I Apply for Angel Funding?
Author - Jason Klein (MBA '86) - Founder & CEO On Grid Ventures, Chairman of HBS Alumni Angels of Greater New York
So you decided to apply to an angel network for funding. When is the best time to apply?
Before you run out of money, of course. But most startups these days have some flexibility given the low cost of lean design as well as funding from self, friends and family.
If you have a truly exceptional startup, or a truly exceptional track record, don’t wait, apply asap. What is a truly exceptional startup? As Justice Potter Stewart said in 1964, “I know it when I see it.”
If you are in the other 99.8% of startups, you should be more strategic about timing.
Some angel groups like to be the first outside funding source. These favor earlier companies with lower valuations, and regularly lead rounds of $500k and up. For them, the sooner you apply, the better. Consider them as soon as you need funds beyond friends and family, and have a hint of demonstrable traction.
For most all angel networks, better to try to wait until you have basic business traction, which I see as:
A working product,
Some revenue and market validation,
Your co-founders are in place (e.g., “I’m looking for a co-founder with [insert skill]” is a red flag.)
It is also better to wait will you have some basic financing traction. This means:
You have a credible lead investor,
You have at least $100-200k and 20% of your round committed,
You have deal terms largely agreed by the lead and committed investors.
Yes, this is an chicken and egg problem. How do you get there without funding? Wing it? Sorry about the pun. Here’s where being a scrappy entrepreneur is a plus.
Most companies that raise angel network funding successfully do so after they have some business and financing traction. There are many more entrepreneurs seeking funding than there are early stage angels and VCs. Supply and demand means that investors can wait, at least in most cases.
Harvard Business School Alumni Angels is one large angel network that prefers companies with at least some basic business and financing traction, and most angel networks fall in this group.
Waiting and self-funding for more months than you’d like isn’t fun. But it may save you time and money, and lead to more fun over the long haul.
Some additional suggestions as your move ahead:
Focus first on angel groups and micro-VCs who could lead your round.
If you do pitch before having a lead investor committed, be prepared for other investors to wait until you find a lead.
Put forward your ask for funding amount and terms, and indicate that you are negotiable once you identify a lead. [If you say that terms are “TBD and up to the lead” you risk coming across as clueless].
Don’t be so greedy that spend too much time with a funding ask that is above the market, and you run out of money and never raise a dime.
Never insist on a SAFE note with a serious angel. They know that is so unfavorable to angels that it can easily be a worthless investment in at otherwise successful company.
Are you an entrepreneur seeking angel funding? Learn more about how to apply to pitch to the HBS Alumni Angels of Greater New York.
Author - Jason Klein (MBA '86) - Founder & CEO On Grid Ventures, Chairman of HBS Alumni Angels of Greater New York.
Jason is an experienced media CEO and builder of digital and traditional businesses who has led two successful turnarounds. He is founder and CEO of On Grid Ventures, an investment and advisory firm with a portfolio of 20+ early stage companies. Mr. Klein is co-President of the HBS Angels Alumni Association. Mr. Klein was previously CEO of Newspaper National Network LP; and CEO of Times Mirror Magazines/Time4 Media, publisher of Golf Magazine, Field & Stream, and Popular Science. Mr. Klein is one of Alleywatch's “25 Angels Investors in NY You Need to Know,” a member of New York Angels, and mentor at several NYC-area incubators.