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How to get funded by business angel networks – Between angels and VCs

We have seen a dramatic increase in the number of business angels, individual investors, who are investing as part of a so-called syndicate; a (large) group of angels, sometimes with as many as 100 members. Frank Appeldoorn and his Arches Capital have taken this to the next level, co-investing alongside many others, including Silicon Valley-based venture capital firm Kleiner Perkins in tech startups, such as fast-growing CodeSandbox.

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“This approach allows our 60+ angels to get peer review on their investments and an opportunity to co-invest with smaller ticket sizes or in larger investment rounds. Usually, this results in an investment that is backed by 7 to 15 angels, organized and reported on, by Arches.”

“One of the reasons for startups to know why this is important,” Appeldoorn states, “is that the alternatives for angels are either doing everything yourself, which is a lot of hassle, or investing through a fund, where they have no say in who the fund invests in. With a network like ours, startups get to collaborate with (former) tech founders turned investors who are actively involved.”

Appeldoorn and his partners thoroughly thought about the best way to provide value for both investors and startups. Resulting in a step-by-step play that leads up to, and goes beyond, the actual investment. In this interview, he shares the four steps for startups to start working with syndicates like Arches.

Who is your perfect partner in crime?

Investors come in different shapes and sizes. Where angel investors usually invest small amounts and VCs big amounts, angel networks can provide sums between those stages, in the case of Arches between €250K and €1 million.

Besides the monetary resources investors provide, startups, especially those with first-time founders, will benefit greatly from so-called smart capital – Investors who not only provide monetary resources, but who are also willing to share experience and a network of potential clients, hires, and follow-up investors.

“One major benefit of working with a network like ours,” Appeldoorn states, “is that from a practical perspective we’re basically a VC, very structured. However, we have a large network of angel investors who all have their own experience and expertise. There will always be someone who can and wants to help out with your day to day struggles.”

Are you the right partner in crime for them?

“As investors,” Appeldoorn shares, “we are aware some will make it and some won’t, so any startup needs the potential to 10X”, or in basic terms deliver a return of investment of 10 times the sum invested in the company. “And even if startups have the potential, they still need to prove it.”

Several variables Appeldoorn and his partner look for in a startup include:

Market & Team

“We not only look at the size of the market, but also how unique your approach is and how well-suited your team is to cater to such market. Are you building for corporates, I will expect someone who knows how to manage their difficult buying processes. Are you focused on SMEs, then you will need someone who can automate online marketing processes.”

“To find out how unique your approach is”, Appeldoorn says, “first, find out through your current clients why your proposition is valuable to them and second, look at competitors and evaluate how different your business model is from theirs.”

“Another reason why it’s important to have at least a few customers before you approach an investor, is the bottom-up approach to estimating market size. Who are your current customers and how many of those are there? A much better approach than top-down, where you use research reports, which usually present way bigger numbers than the actual market. Especially because startups lack the resources to cater to everyone and should therefore start in a specific niche and expand from there on.”

Sales approach

“Then, when you know the market and your position in it, we look at your plan and the approach. The common assumption is still that you have to build first and then sell, but apparently, we still have to explain that it should be done the other way around. Only by selling your solution, you will know what to build.”

“We want to know how easy or hard it is to acquire customers and what you have achieved so far. What’s your CAC (your costs to acquire a customer), your churn (what percentage of your customers quit after a week/month/year) and LTV (what is the amount you make from an average customer during the time they are your customer)?”

What you need to know

Every startup is different and one investor is not the same as the other. However, there are several tactics for increasing investor interest in general.

Be aware that it takes time. “If you’ve completed your entire funding round within 6 months, you’ve done a good job. It starts with building relationships. You need to be responsive, open and transparent. Next are the negotiations, signing the term sheet and then actually getting the money on your bank account. Even working with Arches, the entire process can take up to 2 to 3 months, double that when there are co-investors involved.”

Know what you need. “Different investors will expect different runways in your proposition.” The runway being the time you can bridge with the money you get with the investment. “What different investors will have in common though, is that they expect you to be able to last for at least 18 to 24 months. At Arches, we suggest at least 20 months. And the money shouldn’t be used for paychecks for the founders or current employees, but for growth only.”

Agree on good and bad leavers. “What happens when one of the founders decides to leave early? You have to make sure that you agree on scenarios that will not kill your company.” See this article by Sjoerd Mol of Benvalor for a clear explanation of good and bad leavers and how you should approach this.

Consider the investors’ position. Where some investors will take any position, Appeldoorn states that at Arches, “we want to be your first investor.”

Think about the terms. One of the most spastic items is the term sheet. A lot of founders have very strong feelings about the unimportant topics and don’t care about the things that matter. As a founder, you’re gonna need to be flexible if you want to work with others. “Do you exceed your budget by a large margin or are you changing anything about the cap table,” who owns what amount of shares, “like hiring a senior executive or closing a next funding round, then we want to have a say in this.”

Finally, how to get in

Checked everything off the list? Are you sure you’ve found the right partner and you are the right partner for them? Then the rest is easy. Well, maybe not easy, but easier.

Appeldoorn suggests three ways of getting in touch:

1) “The best way is still a warm introduction. Most of our dealflow comes through the angels in our network or the startups we work with.

2) We visit a lot of events, so check our website and social media accounts.

3) It’s not always the best way to get in touch, but we do read our email and LinkedIn inbox.”