WITH THE MARKET still struggling and real estate in a rut, conventional investment vehicles look like less of a draw to many professional investors.
“There is a general distrust in stocks, commercial real estate is predicted to plummet and residential real estate is at best a very long-term bet,” says William F. Hulbig, an angel investor and founder of Cotuit Capital, a business development firm in Cotuit, Mass. For those seeking an alternative, debt and equity funding of private business is one possible solution, he says.
Hulbig is not alone. Many investors are turning to venture capital as they seek out alternative vehicles that can assure them of some stability or help them break out of the malaise. Yet entrepreneurs may not always benefit in their new role as the safe option or the one with the most upside. The competition for funding remains fierce, and venture funds can be more explicit in their benchmarks and more demanding about transparency. Moreover, some investors can demand a surprisingly high stake in firms they support.
Upon exiting ventures (via mergers and acquisitions and initial public offerings), angel investors typically make 20% to 40% annually, according to the Center for Venture Research at the University of New Hampshire. While last year’s 22% annual returns were weaker than they were in 2007 at 28%, angel investors still managed to stomp returns delivered by the Dow Jones Industrial Average, which declined 34% in 2008.
Still, investing in private enterprises is risky. (Bankruptcies accounted for 26% of exits in 2008, according to the Center for Venture Research.) Those looking for funding today will have to endure tougher questions and be prepared to offer “rock solid” business models, says Bob Lamkin, the managing director of Bay Angels, a Cape Cod, Mass.-based angel investment group and a venture partner at TVM Capital, a venture capital firm in Boston. “The eye of the needle is indeed smaller than it has been,” he says.
Here are six ways to turn investors’ heads today:
Make sure your market is sizable
The first thing investors look for is the size of your market. Their sweet spot? Markets valued at roughly $10 billion. “What we found is that you can fix a lot of things about a start-up, but you can’t fix a bad start-up if you have a bad market,” says Mike Maples Jr., the founder of Menlo Park, Calif.-based venture firm Maples Investments. “In our situation, a business plan doesn’t really matter. We want to understand how your company can get to $100,000 a month in revenue quickly and $1 million one year after that,” he says. Like most VC firms, “our ultimate goal is to back the huge winners.”
Boost your business prowess
Investors want to be sure that you can handle running a start-up — that you can persevere through late nights and few payoffs for a potentially long period of time, Maples says. Having run a successful start-up in the past can help reassure investors. However, regardless of your experience, being able to furnish references that speak to your abilities is vital, Hulbig says. “If you can’t come up with references from someone who’s meaningful, I won’t think you’re worth it,” he says.