“We are getting ready to raise our first round of significant angel money. We came to seek your advice. We need a plan,” said the entrepreneur.
The entrepreneur quit his job and started full time on his dream just over a year ago. It is a vertical market e-commerce site with fast growth potential. He is currently proving market acceptance and already has a couple of small industry investors.
Education Is Hard
The entrepreneur comes from the industry and has the idea and credibility to build the company, but he does not have the credibility to raise money from angels.
“What do you see as your next step?” I asked.
“We will be putting together a presentation for angels who are not familiar with our vertical. We believe that by educating them we will have our best shot in landing early stage funding,” his co-founder said.
“I think there is a better next step,” I said.
“Find a lead investor who has credibility in this vertical. This investor will attract other vertical market savvy investors. This team of investors will then allow you to complete the round with angels outside the vertical, i.e. financial investors,” I explained.
Why Credibility Matters
I have seen it time and time again—entrepreneurs working hard to raise money from market ignorant angel investors. This is an enormous educational effort with no future leverage.
In the end, they most likely fail to raise the money because these investors can’t assess the risk or opportunity. They don’t know the market.
On the other hand, once the entrepreneur lands a higher-profile, savvy market investor, the round closes quickly.
Everybody wants in once there is a person leading the deal who knows what he is doing. The more market knowledgeable the lead angel, the quicker the deal closes.
Strategy That Works
“That approach makes sense.” the entrepreneur said.
A successful fundraising strategy just makes sense. People are very careful with their money. They know they need someone senior in the business who not only invests his money but also watches over the store.