Ask the consultant: Angel investment

  • Updated: February 19, 2012 - 10:28 AM

question

How much of my company should I give up in the angel investment round and the first VC financing?

MIKE SCANLIN, CEO

BORN TO SELL

answer

Many factors go into the calculation of a company's valuation and the resulting amount of equity that is taken by investors at each round of financing.

The biggest factors are how far along the company's products or services have been developed, and whether marketability has been proved with first customers and revenue. Other factors include the industry and niche within which the company will compete, the experience of management in that industry, the extent of patent or other proprietary protection, and the rate and volume to which the company will be able to scale its products or services. Macroeconomic factors also play a part, as we have seen recently with the recession making early stage investors risk-averse and demanding more equity and control.

Entering into complex negotiations with investors is not for the faint of heart or the inexperienced. This is when you need experienced advisers to help you find investors who will add strategic value as well as fair-valued capital. Seek advisers and board members by networking with those who have been successful in your industry. Professionals such as attorneys and financial counselors are also invaluable, but make sure you hire providers who have experience with the type of business you are starting, and with raising capital from outside investors.

Consider seeking mentoring and exposure through a business competition or organization such as the Minnesota Angel Network (www.mnan.org). This nonprofit provides entrepreneurs with feedback on their suitability for outside investment and then prepares selected companies to present their deal to qualified investors.

ABOUT THE AUTHOR

Michael P. Moore is director, William C. Norris Institute, Opus College of Business, University of St. Thomas.

ASK THE EXPERTS

The University of St. Thomas Opus College of Business invites you to participate in the Outside Consultant Q&A column, which appears weekly in Monday Business Insider. E-mail your questions to: www.stthomas.edu/business/schulzeschool/submitquestion.html

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