Rob Neville, CEO of Savara Pharmaceuticals raised over $39M from 350 Angel investors, representing 30 Angel groups from around the world. Neville believes that there hordes of wealthy individuals looking to invest their money in promising startups. Most startups generally reach out to venture capitalists (VCs) for later stage funding, so it was an unusual and historic to raise this level of financing from Angel investors. Savara never specifically eliminated VCs as a potential source of financing, but the momentum within the Angel community simply carried them further than expected. Neville shares his experience with raising Angel funding.
1.
Scale from Angels to Groups to Networks
Raising meaningful amounts of capital from
individual Angel investors is time consuming, and simply does not scale. At
some point Angel groups become an essential part of fundraising, where 20-50
angels meet on a regular basis to collectively evaluate deals. Even Angel
groups have their limitations, and Angel networks are the next logical step. Angel
networks contain many affiliated Angel groups often spread around the globe. In
most cases, candidates will pass screening and diligence only once for the
first group within the network. For the follow on presentations, the screening
and diligence details are shared throughout the network. Essentially, the
candidate can skip the screening and due diligence process and access more
investors quickly. Examples of Angel networks include the Keiretsu Forum and
Tech Coast Angels.
It’s important to have a healthy pipeline of Angels,
groups and networks, considering it takes two to three months to move through their
respective processes, and even the best companies will face rejection.
2.
Tell a Compelling Story
Raising money from Angel groups is
competitive, and the companies than win are those that tell the most compelling
story. Focus less on the details and data – this will surface during the due
diligence process. Neville suggests following a Ted Talk format and encourages CEO
to practice their pitch over and over until it is perfected. In this regard he
refers to Steve Jobs who would practice his story for two full days before
keynote presentation, asking for feedback from product managers in the room.
For 48 hours, all of his energy was directed at making the presentation the
perfect embodiment of Apple’s messages. Practicing the pitch is paramount so
that the flow is seamless and the story takes a meaningful form. Ideally the
presentation should be graphically appealing, without the use of bullets.
3.
Be mindful of non-Economic Motivating Factors
“Do a little Good,
make a little Money, have a little Fun.” Neville uses this to describe the drive
behind Angel investors. While the economic return is an important motivator for
Angel investors, it represents only one facet of attractiveness. CEO’s must be
aware of the non-economic motivating factors that drive Angel investors
decisions, often referred to as altruistic and hedonistic motivations. Altruistic
Angels have a concern for the well-being of others, and wish to feel good about
their allocation of funds. They will invest in stories that resonate
emotionally, that help society in one way or another. Hedonistic Angels wish to
get involved and be a part of an exciting growth story – leveraging their hard
earned wisdom. They will invest in companies that are open to their input and
participation. A compelling story will address economic, altruistic as well as
hedonistic interests.
4.
Align
Management with Angels
Neville stresses the importance of the
alignment of Angels’ interests with those of the executive management, so that they
all rise or fall together. He opens his presentations by mentioning that he has
historically had successful exits, raising Angel funds and returning money to his
shareholders. He then makes it clear that he and his team and board have invested
meaningful capital into Savara. Alignment is influential because in a way it
shows the Angels that you will treat their investment as your own. Angles
appreciate a team that operates frugally, maximizing value creation with each
dollar.
5.
Get ahead of the Due Diligence
Angel investors are accomplished and
extremely busy people. Successful fundraisers keep the investment process
simple and as straightforward for investors as possible.
Typically, a CEO will present twice to any
one Angel group before receiving funds – the first time to motivate and
assemble a due diligence team, the second time to communicate the results of
the due diligence and hopefully collect investments. Candidates can alleviate
work required by the due diligence team by completing a draft of the diligence document
ahead of time. If a company relies on preparation of the diligence report from
scratch by the Angels, it will take two to three months. Some companies with
great stories never get a final due diligence report – often due to the
business of the due diligence team members. Even when the Angels are
actually doing the work, the majority of the information comes from the company
anyways – organizing it beforehand takes out most of the work for the Angels. If
feasible, having one or more existing or prospect investors own the draft
diligence report as their own adds credibility.
6.
Communicate
Often
Given
Savara’s large investor base, investor relations become critical. A large
investor base is often perceived as a liability or overhead, however, Neville views
his investors as an asset. By communicating proactively and often, the Angels
will more likely to participate in follow-on rounds. Savara generates a
detailed quarterly report, and holds quarterly shareholder meetings. All email
correspondence is personalized. A positive and consistent flow of news
generates excitement and confidence in the team’s ability to execute.
In Savara’s
$10M Series C round, a DocuSign was sent to shareholders asking for their
electronic consent (a necessary step before a round of investment can begin).
Within this electronic consent, shareholders were given the option to
participate in the round (by simply clicking a radio button and entering the
amount). Within a few weeks, $6M was committed from existing shareholders.
7.
Close
Prospects as Expediently as Possible
The closing process from presenting your
story to an Angel group to money in the bank must be as streamlined as
possible. Angels have many investment opportunities, and their enthusiasm is
likely to fade quickly after hearing your story, however compelling. Leveraging
the sales funnel metaphor, prospect investors (those that express interest)
must be converted into shareholders in a well-defined and expedient sales
process.
To be effective, Neville found that the sales
process needs some form of closing pressure (or possibility of loss pressure). This
is naturally created when most of the funds have already been committed and the
round is about to end. Breaking a larger round into smaller rounds (or
tranches) creates multiple points of closing pressure. One additional technique
is to offer warrant coverage for early investors. For example, in Savara’s
Series B round, the initial investors received 12% warrant coverage – this warrant
coverage declined by 2% every month thereafter. Without some form of closing
pressure, Angels will not feel any sense of urgency to commit.
Assuming some form of closing pressure has
been created, prospects should be encouraged early to “reserve” a place in the
offering while they complete their due diligence (without any obligation).
Neville will ask early for a verbal range of interest. Once a number or range
has been provided, these prospects become “soft commitments”. Accumulating soft
commitments quickly helps create additional closing pressure.
As soon as a “soft commitment” has been made,
attention moves towards getting signed documents and converting Angels into
“hard commitments”. It must be emphasized that a “hard commitment” does not
come with the expectation of funds transfer – this will happen later. Neville
makes it easy for the investor to sign the documents by using pre-filled DocuSign
forms.
After
receiving a “hard commitment”, a funds transfer email is sent. Collecting funds
should also be as simple as possible, with various funding options being made
available. In the early days, Savara team members would literally collect
checks by hand. Upon receipt of the funds, the prospect is officially welcomed as
a shareholder.
