Ever wonder what angel investors look for in a business pitch? How do they decide where to put their money — and what makes them run the other direction? We wanted to know, too.
We sat down with angel investor David Chang to get his take on the right time to start a business, the must-have elements of a solid pitch, and more. David Chang is the Chief Executive Officer of Gradifi and an Entrepreneur-in-Residence at Harvard Business School. He has held operating roles at five startups and is an angel investor in 40 companies. Connect with him on LinkedIn or Twitter.
Starting a business can be overwhelming and scary, but also exciting and potentially lucrative. How do you know when it’s the right time to turn an idea into reality?
Chang: First-time entrepreneurs often put too much value on the idea or concept itself — but ideas are worthless without execution and a business structure that de-risks the venture at each stage of growth.
As for when to start, there’s no time like the present — or even yesterday — to explore an idea, and with the low cost of capital to start a company today, it’s super easy to put something together and begin to gauge market demand.
When and why should an entrepreneur seek an angel investment?
Chang: Angel investors are a quirky bunch. While a few have a thesis-driven approach to investing, most angel investors decide to back founders on other factors. Since there’s so little data at the early stages of a venture, it’s frequently whether the founder’s story or the problem space resonates with the angel.
However, whether you’re seeking friends-and-family funding, meeting with angels, or targeting VC funds, an entrepreneur always needs to be able to paint a vision for the opportunity and what the venture could ultimately become, as well as a realistic next milestone or stage of growth.
What are some things you look for in a business when considering an investment? Are there any “must-haves” or hard-pass elements?
Chang: I look for founders who are tenacious and seem to figure out how to overcome any obstacle. In the early days of a business, there’s so much risk and so many unknowns that I’m mainly looking for ventures that have option value and can make it to the next stage of growth in order to attract the next round of capital.
A huge plus is when an entrepreneur says what she or he will do and is able to execute on it. A hard-pass is generally founders who believe that capital is the only thing they’re missing from growing the business.
As an angel investor, you’ve probably seen thousands of pitches. What’s one secret that nobody knows about making a great pitch?
Chang: I think the most effective pitches are ones where the founder grounds the investor by articulating both the summit (ultimate long term vision) and the basecamp (next stage that’s within reach). Within the first few minutes, it’s important to anchor the audience on these two endpoints. I can’t tell you how many times I see a founder lose the interest of the investor before both are covered.
If the founder talks only about the summit, the investor has no idea whether there’s any reality of substance behind the vision. If the founder talks only about the basecamp, the investor will walk away with the perception that the idea is too small or not venture-scale.
You often talk about the importance of community involvement — but entrepreneurs and small business leaders often feel like they have to spend every waking minute building and growing their companies. Why should they make time for things like mentorship and philanthropy?
Chang: I’ve seen so many ways mentors benefit from getting involved with the next generation. Not only do they keep fresh perspectives, mentors gain so much personally when connecting with and helping those earlier in their careers.
Whether it’s a new connection, a deeper insight into new technology, or simply a broader network circle, I’ve found these relationships to be so rewarding for those that invest a little bit of time and energy in others.
What advice do you have for someone who’s considering starting a business?
Chang: Go for it! One of the biggest obstacles with starting businesses is the self-perception a lot of first-time founders have that “I’m not an entrepreneur.” So many successful ventures come from a place where someone experienced firsthand a pain point or a problem that, as it turned out, many others also faced.
Also, be honest with what you’d like to get out of the experience — whether the business becomes a lifestyle business or mega-unicorn, there’s a wide range of successful ventures.
Do you have any favorite books to recommend for budding entrepreneurs and business leaders?
Chang: I’m right in the middle of reading Culture.com by Bob Stringer, which is super entertaining since there are so many anecdotes from Boston-area founders and operators.
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