Investors from angel investors fund startups at the beginning of their businesses, in exchange for the opportunity to own a stake in the business. They hope to duplicate the highly-publicized successful investments made by companies such as Airbnb, Facebook, Instagram, WhatsApp, Uber, and many more. Angel investors usually make smaller wagers ($25,000 up to $100,000) with the intention of earning “home run” returns.
Angel Investors recognize that startups face an increased risk of failure. In the end, an angel investor must feel comfortable that the potential benefits and upsides that come from investing are worth the risk.
Angel investors analyze a myriad of issues and perform due diligence prior to investing in a new startup. In this article, I will examine the most important factors angel investors consider when the decision of which investment to make in the startup.
1. Is there a great founder/management team?
Many investors see the team that runs a startup more crucial than the idea or product. Investors need to be confident that the team is equipped with the appropriate set of expertise, drive and the right temperament to expand the company. Be prepared for these questions:
- Who are the founding members and other key team members?
- Do members of the team have previously worked together?
- What experience in the relevant field do the team members have?
- What important changes to the team will be urgently needed?
- What makes the team competent to implement the business plan of the company?
- The number of workers does your business employ?
- What is the motivation behind the founders?
- How will you expand the team in twelve months?
The investor must determine if the team of the founder are pleasant to collaborate with. Does the investor trust the team? Are the CEO’s experience and open to listening? Are they trustworthy? In addition, engaging knowledgeable advisors can be beneficial in the beginning stages to bridge a young-stage team that is expanding.
2. Is the market opportunity big?
The majority of investors are searching for companies that can grow and be meaningful Therefore, you must explain in detail the reasons why your company has the potential to grow into something truly big. Don’t make any weak or unsubstantiated claims. If your first product or service you offer is not a huge success it is possible that you have to present the business as one that is a “platform” business allowing the creation of multiple products and applications. Investors would like to know the size of the market size and the percentage that market intend to capture over the course of time.
3. What positive early traction has the company achieved?
A very crucial factors for investors are indications of initial traction or customer. A business that has gained early traction is more likely to secure investors’ financing and on more favorable conditions. Examples of early traction include:
- The development of a beta or minimum feasible product
- Customers who are pilots or initial customers, with special emphasis on brand name customers
- Strategic alliances
- Customer reviews
- The admission into competition programs like Y Combinator or any other accelerators or incubators
Investors want to know how can the initial acceleration of traction can be improved? What was the main motive behind the early traction? What can the company do to increase this initial momentum?
Do not forget to display any your early buzz or press that you’ve received, particularly from prominent publications or websites. Highlight the headlines in an investor presentation deck. Indicate the number of newspapers and articles that feature the company.
4. Are the founders passionate, determined, and in it for the long haul?
Many venture capitalists are looking for enthusiastic and committed founders. Are they the kind of people who are dedicated to growing the company and taking on the inevitable challenges? Entrepreneurships are difficult and investors want to be sure they have an drive to persevere through the lows and highs of their business. Investors are looking for genuine commitment to the company.
5. Do the founders understand the financials and key metrics of their business?
Investors seek founders who understand the financials and the most important metrics of their businesses. You must demonstrate that you are knowledgeable on everything and you’re competent in articulating them.
Here are some of the most important indicators that angel investors will be interested in:
- The monthly burned rate in the company
- Expected revenue growth
- Gross margin
- The value of lifetime for the customer
- Cost of acquisition for the customer
- Gross revenues are the most important component of gross and gross expenses are the key components of gross revenues and
- How long will it take for the company to reach profitability?
- What amount of capital will be required to be sought in the near future and, if so, when?
- Other important performance indicators of the company (KPIs)
6. Does the investor know the entrepreneur? If not, has the entrepreneur been referred by a trusted colleague?
If the investor is already familiar with and admires the entrepreneur, this can be a huge benefit. If the entrepreneur isn’t familiar with who the financier is, then the most effective method of attracting your attention would be to receive an enthusiastic introduction from a friend or colleague who is trusted such as an an entrepreneur or lawyer or an investment banker an angel investor or venture capitalist. Angel investors are bombarded with uninvited executive summaries and pitch decks. A majority of the time these solicitations are not read unless they come from an authentic source.
7. Is the initial investor pitch deck professional and interesting?
The first thing that investors will want to see is an investor pitch that is 15 pages long deck prior to attending a meeting. In the pitch deck, investors want to find a fascinating business model that has dedicated entrepreneurs and a huge opportunity. Make sure that you’ve created and reviewed a top pitch deck. Examining other pitch decks and executive summaries will help you to improve your personal one.
8. What are the potential risks to the business?
Investors are interested in knowing the potential risks to the company. They want to know your process of thinking and the mitigation measures you are employing to mitigate the risks. There will be risks with any business plan it is important to address these questions with care:
- What do you consider to be the most significant risks for the company?
- What legal risk do you face? Do you think your business model will conform to the laws in force and privacy laws, such as expanding protections for personal information?
- What risks in technology do you face?
- Are you concerned about any regulatory risk?
- Are there any products-related potential liability issues?
- What are the steps you’re planning on taking to reduce the risk?
Startups who can demonstrate that they have decreased or eliminated the need for the technology, product sales, market risks will be able to gain in raising funds.
9. Why is the company’s product great?
Entrepreneurs must be able to clearly explain what their product or service is and what makes it distinct, and entrepreneurs can expect to be asked these questions from prospective customers:
- What are the reasons that users are interested in products or services you provide?
- What are the most important milestones in the development of a product?
- What are the main distinguishing aspects of your service or product compared to the competition?
- What can you learn from earlier versions of the service or product?
- What are the three most important aspects you’ll be adding to your list?
- What frequency do you think of an improvement or update to the service or product?
- Have you got any positive customer review?
10. How will my investment capital be used and what progress will be made with that capital?
Investors will definitely need to know where they will invest their money and the burn rate you propose (so they know when you might require the next round of funding). This will allow investors to assess whether your fundraising strategies are reasonable in light of the capital requirements that you’ll face. Additionally, it will allow investors to assess whether the estimate of your costs (e.g. for engineers, marketing expenses and office spaces) is reasonable in light of their previous experiences with similar companies. Investors want to ensure that you have enough capital to cover your next milestone in order to secure more funding.
Final Tips for Entrepreneurs Seeking Angel Investors
Here are some suggestions for entrepreneurs looking to get angel investors to finance their venture:
- Investors who are angel investors that invest in your area (San Francisco, New York, L.A. and so on.). Certain investors only invest in companies that are within their vicinity.
- Find Angel investors that invest in your industry (software web, mobile, internet biotech, cleantech etc. ).
- A great 15-page investment pitch deck.
- Try your pitch out and get feedback. Be prepared for pitch sessions via Zoom as well as other online platforms.
- Make a product demo or have a professionally-produced video created.
- You should have done your homework on your competition, and anticipate questions you might be asked about competitors.
- Let the investor know that there’s a chance to take a major deal ( M&A or an IPO) in the next three up to 7 years.