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and includes the information investors say they need. The IOP, then, speeds
The Solution: A Strategy That Works

up qualifying the investors while it assists in developing confidence about
The IOP summary should highlight the most important points of your
business, those that will convince potential investors that your venture will
succeed. The criteria were developed by surveying sophisticated investors
from around the country in ICR™s proprietary database, and indicates what
investors want to see in your executive summary:

The Company™s Business
– Define business purpose and strategic mission.
– Provide summary of your company™s history and current status.
– State overall corporate strategy and objectives.

The Products or Services
– Describe important features and benefits”relate to market needs and to
the competition.
– Describe existing products and status of new products.
– Discuss pricing and margins for both your products and your competi-
tor™s products.
– Explain proprietary position.
– Articulate any relevant regulatory or environmental issues.

The Market
– Market analysis.
– Market strategy”How are you going to reach the market?
– Competitive advantage”What makes you different?
– Competition.
– Discuss the issues or circumstances that “drive” or create the market.

The Management Team
– Give brief backgrounds of key individuals”specifically, why they add
value to the company, their past successes and achievements, and so
– History of working together as a team, roles, and responsibilities.
– Board composition.

The Financial Summary and Deal
– Provide revenues, income, and expenses projected over three to five
– Key financial assumptions.
– Define funding requirements to achieve break-even and profitability.

– Anticipated valuation and deal structure overview.
– Use of proceeds.
– Exit strategy.

But what precisely do we mean by “line up precommitment”? What is
its operational meaning? How do you accomplish “precommitment”? You
do so by making certain that you are talking to real investors. Again, the IOP
becomes strategic. The IOP helps in developing confidence about precom-
mitment and at the same time speeds up the qualifying of investors.
Developing confidence about precommitment leads us directly to the
business of qualifying investors. And how is that best accomplished? Based
on our experience, the way to get frank answers is by asking frank questions
of the investors themselves. Who better to answer them? Exhibit 3.6 outlines
a sampling of such questions: Has the investor previously invested in deals
that address this market? What is the dollar amount he or she has invested
within the past three years in this type of deal? How typical is that amount?
What degree of familiarity has he or she with this particular industry? What
motivation is involved? What does the investor feel he or she needs to know
about this particular investment opportunity? How much capital is available
to him or her? Will he or she co-invest? Do the criteria match the deal? How
long will the investor™s due diligence take? What most successful investment
would the investor like to make again? What security or deal structure is pre-
ferred? How much time is expected to reach liquidation? Is the investor will-
ing to meet in person with the entrepreneur? Has the investor read the
business plan?
Are these questions easy to ask? No. Must they be asked? Absolutely.
These are the questions that must be asked if the deal has any chance of mov-
ing forward. We advise having a preoffering commitment or serious level of
interest equivalent to three to four times the money you need before spending
serious money on legal documentation. Using the IOP can help you ascertain
whether sophisticated investors are interested in your deal.

Aggressively Manage Database Development
The cost of developing and maintaining your company™s investor database
goes beyond those expense items listed in Exhibit 3.4.
As an example, ICR has invested more than $350,000 in development
and periodic update of its 1,357 high-net-worth, early-stage investor data-
base since 1989. In addition, there are monthly expenses associated with
keeping contact information on investors current and accurate; updating
changes in their status, such as liquidity; investment size; preferred stage of
development; industries of interest; level of preferred involvement; results
The Solution: A Strategy That Works

EXHIBIT 3.6 Key Questions for Qualifying Angel Investors

• Has investor invested in deals that address this market?
• Dollar amount of investment of this type made in last year? Typical
investment size? How many per year?
• Familiarity with industry?
• Motivation to invest?
• What does investor need to know about the opportunity?
• How much capital is available?
• Does investor co-invest with others?
• Do investor™s criteria match parameters of your deal?
• How long does investor™s due diligence process take?
• All-time greatest investment investor would like to make again?
• Preferred security or deal structure?
• Time until liquidation?
• Is investor willing to meet in person?
• Has investor read the plan?

Source: International Capital Resources

from past investments; and current level of investment activity, for example,
the number of investments made per year. These expenses come on top of
database development programs used to expand the database with new in-
vestors; for example, web site, book research and publishing, seminars, con-
ferences, newsletter and quarterly mailings to inform investors about
developments in the private equity market.
Aggressive database development and maintenance practices begin with
using multiple sources to build your proprietary high-net-worth listing.
Database development involves gathering pertinent information quickly and
thoroughly on investors who have been located through investor contacts.
Most important, your database, when you maintain it properly, is your best
record to legally defend your private placement exemption. By keeping ac-
curate and updated records with supporting notes on how the investor came
to you, by documenting the careful development of the relationship, by
chronologically logging the documents sent to them at their request, and by
keeping track of all communications, the entrepreneur can defend his or her
strategy for raising capital just in case such defense becomes necessary.
Also, aggressive database development means qualifying the investors
whose names you permit to be listed on your proprietary database. In our
experience, the best way to qualify individual investors is by examining indi-
vidual wealth data and characteristics”as opposed to relying on more
generic statistical categories, such as what you might find in census data.

Many times an in-person interview or subscription questionnaire is the only
way to obtain sensitive information, such as previous investment behavior,
financial holdings and portfolio (especially that segment of the portfolios
placed into private equity), current status in a profession or industry
(whether they are entrepreneurs building a company or have previously done
so), and, finally, net worth excluding home and automobile in order to meet
accredited status. For example, ICR sends a questionnaire to every investor
in its database periodically to ensure that the data on those investors are as
current and complete as investor disclosure will allow.
Some entrepreneurs rely on simple databases or sales databases to keep
track of their investor contact information. Although these tools are ade-
quate when only a small number of investors are included, they quickly be-
come inadequate as the financing campaign develops; for example, past
prospects who might be interested at later stages of development, current in-
vestors, current investor prospects being worked out and at different stages
in the sales pipeline, and referral sources used in different ways to generate
new prospects. All investor databases being used to raise money eventually
should be converted to a relational database platform, using software to as-
sist in database management. Individuals building the database must be per-
sistent in their contact with the investors on the list. Many entrepreneurs
establish regularly written and electronic communications updates as a way
of facilitating staying in touch with the investors whom they have identified
and with whom they hope to be working in the future.
Later we will have more to say about the technical nuts and bolts of
building and maintaining an investor relational database.

Go Directly to Qualified Investors
The search for direct, private investors can be speedily accomplished in a
number of ways. Trying to keep the securities instruments as simple as pos-
sible is one commonsense approach. Anticipating the due diligence ques-
tions”especially those coming early in your interaction with investors”is
another. Be clear about your deal structure, that is, whether you are seeking
equity or debt, and what valuation you place on your venture in anticipation
of negotiations.
The cornerstone of any strategy”the goal of which is to increase the ef-
ficiency of the private placement process”invariably involves the challenges
of finding and going directly to investors capable of investing in early-stage,
higher-risk ventures. To implement such a strategy requires that entrepre-
neurs break down their fund-raising program into campaigns directed to-
ward the key components of the angel capital market. These targets include
potential individual investors to whom the entrepreneur is related, involved
The Solution: A Strategy That Works

with socially, or is closely associated with professionally; individual, nonre-
lated, high-net-worth investors interested in high-risk/high-return transac-
tions; venture forums; angel groups, formal and informal; financial
intermediaries with proprietary databases of investors available for referral;
and direct private offerings under protection of new government legislation.
All these sources can lead to investor prospects to expand your potential
pool of capital suitable for your venture.
We mentioned earlier the conservative approach of lining up three or
four times the money you need before spending financial resources on docu-
mentation. How do you begin to do this?
You start by going directly to prospective investors with whom you are
closely related, who know you, and who trust in your integrity and might
wish to support your vision. This includes family, more distant relatives,
friends, neighbors, acquaintances, fellow school alumni, business associates,
professional colleagues, and perhaps fellow members of any clubs or organ-
izations. In our many years of working with entrepreneurs, many turn to
much more difficult capital sources before working with this source of “cra-
dle equity.” It is true that these sources may not subject you to the same level
of due diligence as more sophisticated, nonrelated investors, but a small suc-
cess in the beginning of the fund-raising process can be a real morale booster.
Next, continue working this resource by turning to the professional serv-
ice providers in your personal database. These direct sources include your
doctor, lawyer, accountant, banker, tax adviser, and insurance and securities
broker. When you approach this group, also solicit referrals to others they
may know, others who just might be interested in your deal.
The last group you go to after working with those who have an affinity
for you personally are potential investors who would stand to benefit finan-
cially if your venture became a sustainable company. Included among the in-
vestor prospect group that has a natural affinity for the venture are suppliers,
distributors, customers, and potential employees or managers. Included in
this group is anyone who may be enamored with your technology and would
support a company commercializing the technology. The tremendous success
by Red Tail Ale in raising capital from loyal beer drinking customers illus-
trates the point.
In short, the first pass involves dealing directly with the people who have
money to invest. The strategy of going directly to people with an affinity for
you, your venture, and the technology is much more constructive than turn-
ing to a directory, cold mailing lists, or public advertisements.
The second approach suggests building your own database or prospec-
tive investor leads. Sophisticated private investors who prize their privacy
and do not get involved in angel groups are difficult to locate and establish
relationships with. Lacking the elements of more formal networks, these in-

vestors, based on our research, find their deals by referrals from family,
friends, co-workers, and colleagues, and through professional intermediary
referrals. Rarely can you reach them by contacting them directly or by send-
ing information over the transom.
However, it is true that many lone angels are dissatisfied with these ex-
isting channels of communication for generating deal flow. Based on re-
search by Harrison & Mason, as many as 43 percent suggest they are open
to other means to find promising deals. And herein lies the opportunity for
entrepreneurs to build their investor bases. By understanding how self-suffi-
cient investors generate their deal flow, astute entrepreneurs can find open-
ings to spawn leads for their own deal and identify potential investors with
whom to develop relationships.
While most solo angels do have a deal flow development strategy be-
yond family and friends referral, most have developed it intuitively, not hav-
ing taken the time to make it explicit. Individual investors who remain
unaffiliated with angel groups do use a number of channels to get the word
out regarding their investment interests and to augment their deal flow.
These channels include listing under a business address in upscale directories
and software databases, membership in regional venture capital associations,
joining highly protective offline investor networks and online matching serv-
ices, speaking at local venture-related seminars and conferences, volunteer-
ing to participate in incubator advisory boards, publishing articles or being
interviewed and quoted in books and articles for the business and investment
press, and joining preferred industry associations. ICR, the angel investment
company founded by one of the authors, has used all these sources to suc-
cessfully locate and surface qualified investors since 1989.
The third technique for going directly to investors is correctly using ven-
ture forums. Each year more than 60 major venture forums, conferences,
and investment meetings in the United States bring together entrepreneurs
and investors.
In these forums, conferences, and meetings, individuals meet directly
with investors, receive valuable feedback on their ventures and offerings, dis-
cover investor interest in the entrepreneurs™ transactions, and obtain the crit-
ical contact information needed to follow up on prospective investors after
the event.
In our directory in Chapter 9, we list a number of the most prominent


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