From Interest To Wire: How Smart Founders Actually Close Angel Rounds

How do smart founders actually close angel rounds? Angel investors are the preferred capital source for most early-stage founders, right after their friends-and-family round. The core advantages typically include flexibility in the expected terms and conditions.

Angel investors also have a higher risk tolerance when they can anticipate higher, assured returns. If you’re approaching such investors, you can expect that the round will close quickly. Approval times are shorter, which can be an added benefit if you’re exploring time-critical opportunities.

Angels prefer to invest in sectors where they have experience and expertise, and are happy to share it with founders. As a result, you can rely on them for guidance, mentoring, and networking openings. All of these pros can propel your company forward. So, how would you close angel rounds?

What are the usual pitfalls to look out for? What are the terms and conditions to expect in the term sheet? How would you value the startup to pique investors’ interest? Read ahead to know more.

Don’t Have a Lead Investor? Leverage Your Network

Landing that elusive lead investor is a challenging task, one which you’ll approach cautiously. This entity sets the tone for your capital-raising success and influences the kind of investors you’ll attract. If you don’t have a lead investor yet, your next strategy should be to leverage networking channels.

Check online platforms that list angel investors, such as AngelList, Equivista, and Angel Match. Also, consult advisors who can connect you with high-net-worth individuals who may be interested in backing your company. But make sure these entities are accredited.

Also attend seminars, conferences, and other events where you can interact with angels. Be ready with an elevator pitch. Remember that the lead investor typically performs the due diligence and provides the initial term sheet.

Angels and other investors are likely to follow through if the lead is a credible figure in the startup ecosystem. The lead investor typically has the resources to thoroughly vet the startup, particularly if its operations are complex.

The check size you’re pitching for can also influence the need for a lead investor. Many angels prefer to let an institutional investor evaluate the startup and negotiate funding terms.

Understand that not all angels are familiar with the business landscape, the industry, or the product you’re pitching. They might be high-net-worth individuals only seeking investment opportunities. Thus, they partner with a mass syndication that has the lead or sponsor, as well as investors or backers.

How Mass Syndication Works

A mass syndicate is a large pool of individuals and/or financial institutions, such as venture capital firms. In recent years, more VC firms have set up micro-VC arms to finance promising startups with the potential to deliver rich returns. These are the capital sources you’ll target to close angel rounds.

Once your lead investor offers you a favorable term sheet, you’ll use it as social proof. That’s how you can demonstrate that the startup is worth investing in. At this stage, you should be clear about the terms and conditions you want in the term sheet. And the unfavorable terms you want to avoid.

Don’t lose sight of the fact that other investors may use this term sheet as a framework for their own terms. Your next strategy should be to adopt the rolling close model instead of the minimum close requirement.

According to the rolling close, you’ll finalize the investment deal with each investor once negotiations are complete. You needn’t wait for soft capital commitments from all investors to reach a minimum threshold to close angel rounds. You’ll offer convertible notes at varying terms and finalize the capital raise.

The most effective strategy here is to talk about the investors you’ve already landed. Creating the right hype is likely to attract more investors. At the same time, prepare for the possibility that the mass syndication will fail if a key investor backs out.

If that happens, your strategy should be to gather information about the reasons, such as an internal cash crunch. Macroeconomic conditions, disagreements with the investor, or loss of confidence can be other factors.

You’ll resolve the issues on your end, then quickly reach out to other investors who’ve expressed interest. Line up alternative capital sources to complete the funding round.

Target the Right Investors with Warm Intros

When putting together a list of potential investors to approach, you’ll prioritize people who are familiar with your ideas. Or, your track record as a successful entrepreneur with one or more exits to prove your business acumen. When reaching out to them, don’t hesitate to drop big names.

Your objective here is to create Fear of Missing Out (FOMO) to encourage more investors to express interest. Don’t forget that you’re aiming for impressions that convey scarcity and urgency, prompting angels to invest.

Tap into your network of other founders, friends, colleagues, and mentors to get introductions. Warm intros help you close angel rounds more easily.

Keep in mind that storytelling is everything in fundraising. In this regard, for a winning pitch deck to help you here, take a look at the template created by Peter Thiel, Silicon Valley legend (see it here), that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that founders worldwide are using to raise millions below.

Land the Right Term Sheets

The first term sheet you receive from the lead investors sets a benchmark for future term sheets. As your expert fundraising consultant will advise, it’s always preferable to price the startup at a rate that is slightly below market value. At this stage, you’re attempting to build trust with your investors.

Experienced founders also suggest drafting a term sheet on your end with terms that favor the company. You’ll also outline unfavorable terms. As a result, you’ll have two term sheets to work with. They will create a cornerstone for future negotiations when you close angel rounds.

Rely on your fundraising consultant to carefully review the term sheet and ensure you understand the clauses and provisions thoroughly. Don’t just study them from the perspective of raising your seed round. But also how the clauses will influence future funding rounds and, consequently, dilution.

Be cautious about the board seats, voting rights, and ownership stake you offer in lieu of capital. You’ll also analyze their impact on your control over the company’s operations, current and future.

Since your startup is still at an early stage, it probably won’t have a board of directors. However, offering a board seat can depend on the capital you’re raising. For instance, if the raise is around $300K from multiple investors, it’s always advisable to appoint an external board member.

But, if you’re raising, say, $2M from institutional investors, they may require a board seat. However, you can work out the level of control the seat will have when you close angel rounds.

Also note, investors typically want to see a vesting schedule and how equity is split between the cofounders. You’ll also want to set up an option pool early on to reassure investors.

Meetings with Angel Investors

When you walk into the conference room, it’s crucial to come prepared with founder-friendly terms and conditions. Be sure of exactly what you can and cannot agree to.

If the investors are interested, they might ask about the commitments you’ve gathered so far. At this stage, you can be upfront about the estimated date by which you hope to close angel rounds. Details of the capital you’ve raised so far and the other names on your cap table are positive signals.

Be transparent about the terms you’re offering, including the convertible notes and the valuation caps associated with them. You’ll also highlight how these terms benefit investors. Terms like liquidation preference and convertible debt rights will likely be of particular interest to them.

Investors like preferred shares because they de-risk the investment if the company fails. However, you should be mindful of how follow-on investors will perceive them. Each time you raise a new round, you’ll have to get approval from existing investors.

Regardless of how small the seed round is, it’s always preferable to offer some protective provisions. For instance, the right to veto a new funding round or the sale of the company. But, if you do provide these provisions, ensure that you’re dealing with qualified investors.

These entities should understand how the startup ecosystem, market conditions, and well-timed profitable exits work. Raise a formal funding round only from people with whom you have a robust working relationship.

When providing references, only list investors who have signed the term sheet, finalized the deal, and wired funds. Avoid listing entities that have only committed to backing the company, unless you have email confirmations.

Be cautious about misrepresenting references because your credibility could come under scrutiny. Getting approvals before using names is crucial when you close angel rounds.

Follow-ups and Feedback

As the meeting draws to a close, you’ll ask investors for their feedback about the pitch and note their responses. You can also ask whether they liked the pitch and whether they are interested in investing in the startup. Don’t hesitate to inquire about the dollar amount they’d invest.

Also, request introductions with other angels within their circle. Don’t forget to check whether you can use their name as a referral when approaching other investors. If you get positive responses, that’s a good indication you’ll close angel rounds successfully.

When learning about how to close angel rounds, you should first understand how angel investors and angel groups work. Check out this video in which I have outlined insights into their standard operating procedures. You’re sure to find them helpful.

Setting a Deadline for Closing Angel Rounds

Even though you’ve adopted the rolling close approach, you should have a deadline for closing the round. Communicating this time frame to investors also helps create a sense of urgency. You could leverage milestones like an upcoming partnership, successful R&D, or favorable regulatory changes.

The objective is to incentivize investors to grab shares in the company, which can become highly valuable in the near future. Hinting that the round is oversubscribed is another nudge to get investors to commit.

Finalizing the Funding Round to a Successful Close

Founders can opt for a rolling close or wait until they meet the minimum close requirement to get funds transferred. Whatever your preference, you’ll email each investor the term sheet with the specific terms and conditions you discussed. Also, check if they are ready to proceed with signing.

Next, you’ll follow the guidance of your professional consultant to complete the documents and get confirmatory signatures for the round. Work with your legal counsel to draft the paperwork and assemble the investor packets. You’ll use physical or digital copies per each investor’s preference.

To close angel rounds, you’ll include instructions for wiring the funds or sending checks. Once you receive the funds, you can evaluate whether to keep the round open to cover any shortfalls. Or, to allow interested investors to participate at this valuation.

Alternatives to Angel Investors

A rolling close approach typically involves multiple angels and other investors offering small checks until the round closes. Aside from angels, you’ll reach out to other capital sources to ensure that you raise the required funding.

As mentioned earlier, you could approach venture capital (VC) firms that support startups through their micro-VC arm. Although they are investing in multi-stage companies, ensure that their criteria align with your startup’s needs.

For example, the startup should be ready with a minimum viable product (MVP) or have reached a minimum revenue threshold. You should also prepare to undergo detailed due diligence and to offer a board seat, complete with pro-rata voting rights. Excessive dilution is another crucial concern.

These investors may also need to analyze your financials, which an early-stage startup typically lacks. Most importantly, if they choose not to participate in follow-on rounds, that could send negative signals to other prospective investors. Your solution is to close angel rounds that you have lined up.

Continue reaching out to other angels while using the available funds to scale the company. Develop the MVP, build a robust customer base, and start raking in revenues by growing sales. Your objective is to improve the company’s valuation so that more investors are encouraged to invest.

Before We Sign Out!

Angel investors are a great source of capital for seed-stage startups that have not yet demonstrated robust metrics. When you close angel rounds, you’re looking for an accredited lead investor and other smaller investors to get the company off the ground.

Your best strategy is to leverage an expert fundraising consultant to help you raise the necessary capital. And, guide you through the steps to complete the round successfully and get money in the bank.

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