Angel investors are high-net worth individuals who invest their own money in founders, startups and early-stage companies. Unlike VC’s, angel investors typically fund companies that are in their very early stages, making these unproven investments much more of a risk – and that much more of a payoff if they pan out. Many angel investors provide mentoring and guidance in addition to their financial investments. According to a 2020 report, 25% of portfolio companies’ total funding came from angels, with 40% of deals including an angel seat on the board of directors. Angel funded companies raised $2B in total capital from multiple sources, multiplying their initial angel investments about 7 times. With so many startups out there, it can be extremely competitive for a founder to attract the interest of an angel investor. Additionally, we aren’t just evaluating YOUR business, we’re comparing it to the many other startup opportunities we see. So, how do you set yourself apart? Here are the top 5 things an angel investor looks for in an investor.
The Top 5 Things Angel Investors Look For In An Entrepreneur
1. Business Potential – Return
Angel investors invest in young companies, often with unproven founders, so we’re taking a considerable risk – in exchange for the chance at a much higher return. Its’ not enough to demonstrate there is a market for your product. You have to educate the investor that the opportunity has a clear value proposition, there is a great (large and growing TAM, Total Addressable Market), that your solution is unique, the time to build it is now, that you and your team are the ones to do it and there is lots of money to be made in doing it. A good rule of thumb is the 7-to-1 rule: a seven (after-tax) dollar return for every dollar the angel investor contributes to the company, within seven years.
2. Strong Management and a Strong Team
Bad founders and poor leaders can ruin a great idea. Great founders can turn a mediocre idea into a great company. They surround themselves with great people and build phenomenal teams. They invest their time building and aligning their teams to their vision. As founders, you should be able to define your motivations, whether you’ve worked together in the past, and how your leadership is uniquely suited to leading the company and executing on your goals and mission.
More than anything else, it needs to be clear to angel investors that you can march your small army through the battlefield of the startup experience and you’ll be the last woman/man standing.
3. Business Structure and a Solid Business Plan
Drive, Clarity and Vision
Angel investors appreciate entrepreneurs that are on a mission. They may not be driven to change the world but they are driven to change their industry. Great founders have clarity of purpose and a plan to achieve it. They are not distracted by the newest shiny objects, but instead have clarity and a process to build it. But, they’re also flexible and are able to navigate the land mines that all startups face. Great entrepreneurs won’t focus on the obstacles they face but rather on the goal and drive the team and business towards that mission. Having a plan is as much about what you won’t do as much as it is what you will do. As Mike Tyson famously said, “everyone has a plan until they get punched in the face.”
4. A Reason To Invest
Angel investors choose to invest in startups for different reasons. In some cases, angel investors are funding someone in their immediate network and, in others, they have a passion that leads them to focus their investments in a specific field, like technology, space, medicine, etc. For others, they seek to fund philanthropic ventures that will have a positive impact on the world. Some angel investors are interested in putting their expertise and experience to work creating something new and outside of their typical investment. Whether their financial support might make the world a better place, or might make them wealthier, founders should be able to provide a reason for an angel investor to get behind their startup.
Why is this angel investor particularly suited to your company? How will their involvement, more so than anyone else, further your success and prove invaluable? Discover their motivation and give them a reason to invest.
5. An Exit Strategy
Angel investors understand, often more than founders, that the goal of getting into
business is actually to get out – and to do so profitably. Ensuring your business has a variety of sound exit strategies helps mitigate their risk and forecast how they will be paid out when that day comes. In some instances an exit may mean a sale of shares to the company’s principals. In most cases however, a sale or IPO is the ideal exit for most investors. Either way, they’ll want to see some projected paths to the end game.
Other Factors Angel Investors Consider When Investing In A Business
Showing angel investors that your company has traction is important. Rapid user adoption, high engagement rates, low customer/user churn, paying customers, important strategic partnerships are a few key points of early product market fit that investors will be evaluating. If its really early, past professional achievements, prospective customer letters of intent, or a working minimum viable product may be enough to excite an angel. Being able to define your success, the key indicators you will set and hit to achieve it, and how you plan to grow sustainably, help define a path for your company. All of these considerations demonstrate to an angel investor how ready the market is for your product and potentially how good of an entrepreneur you will be – all of these help to reduce their risk.
Pitching To Angel Investors: Giving Angel Investors What They’re Looking For
It’s critical to provide angel investors with the information they need in a way that catches their attention – and doesn’t waste their time. The best pitches are 3 minutes or less. Enough to excite and leave a prospective investor asking for more. As a start, most angels typically expect to see a clear tag line, Problem, Solution (your product,) How it works, Team (Why you and why now,) Total market opportunity, Competition, Traction, How you will make money, & the Ask.
If you’re passionate, and have a world-changing tech product that solves legacy problems, let’s talk.