For early-stage startups, securing funding from angel investors can be a crucial step toward growth and success but what do angel investors look for in a startup?
Many key factors influence an angel investor’s investment decision. As an entrepreneur, it is worth understanding what some of these factors are to ensure that your business offers potential investors an attractive proposition to put their own money into.
Angel investors operate differently from other funding mechanisms such as crowdfunding, accelerators, or venture capitalists so it is worth understanding what these specific kinds of investors are looking for.
At a basic level, angel investors are looking at two things when they appraise a potential investment opportunity. The first thing that they look for is a solid business plan, and closely following this, angel investors will look at the team members that are behind the business idea.
The startup’s team plays a critical role in determining the potential success of a business. Good business ideas aside, if the team behind the idea does not have the necessary expertise or skills to deliver their vision then this will pose a problem since so many early-stage companies fail before they manage to establish themselves.
Startup founders will need to bring something else to the table other than just a good idea. For example, they will need to demonstrate a level of technical expertise or business acumen. Some entrepreneurs may have an established track record and be able to show an angel investor that they have experience in a certain field.
In some cases, if an angel investor sees something special in a business founder, then they may act in a mentorship role to help provide support to the business if there are areas that the business founder is lacking in.
A lack of industry contacts can often be a problem for young entrepreneurs and founders. This is often an area that angel investors are happy to help with since they are often entrepreneurs themselves who may have a lot of industry experience. In these cases, mentors may look to open up their business contacts and industry connections to help support the new business. Sometimes angel investors can facilitate partnerships between existing companies and a new company.
Angel investors seek startups with innovative solutions that stand out in the market. A unique value proposition (UVP) that addresses a real pain point or creates new market opportunities is essential. Furthermore, the business model must be scalable, meaning it has the potential to grow rapidly without requiring exponential increases in costs.
Aside from the people, angel investors will primarily be looking at the business idea that they are investing in. Angel investors will help fund a spectrum of different businesses, but they will all have a few elements in common, regardless of what the business itself will entail.
Typically, angel investors will be looking at a business’s potential revenue model to see how it is going to make money. Ultimately this is the key factor for attracting investment. The angel investor needs to see that there is potential to get a return on their investment. Understanding how a business might generate revenue is essential in any business, not just one that is looking for startup funding.
A business that is already operating and has a revenue stream will be more likely to attract angel funding but the ability to demonstrate its potential is also something that is needed. Early traction can be a key indicator of the type of potential that the business might offer longer term.
Angel investors will look at a business to determine whether it has a competitive advantage over other propositions in the marketplace. Many people believe that a small business needs to have a unique value proposition (UVP) that creates new market opportunities. However, whilst this is preferable, this is not necessarily needed in every case, if the business can demonstrate its ability to be competitive. Entrepreneurs will need to think about what is so special about their business, and what makes it different from its competition. Perhaps it has some proprietary technology, has unique branding, is first to market, or can operate much cheaper than its competition. Businesses that cannot establish their own unique selling point (USP) may struggle to convince angel investors and angel groups that they are worthwhile investments.
A business will need to show a good, well-considered business plan with viable products to attract funding and interest from angel investors.
Not all businesses need to become global phenomena to be successful, but the potential market size that a business will operate in will be an important consideration for any angel investor looking to invest money into a business.
As a part of the business plan, an angel investor will be expecting a founder to have done their market research to establish the potential reach of the business that they are starting. Entrepreneurs will need to understand where their customer acquisition comes from and how large a market they will have access to. For many angel investors having a firm grip on these data points will be as important as the addressable market size itself.
Many Investors want to ensure that the startup operates in a sizable market. There may be scope for those looking for investors for small local businesses, but the more money an entrepreneur is looking to get for their business, the bigger the market they will likely need to have available to them.
Angel investors are looking for valuations that provide room for a significant return on investment. When trying to attract an angel investor a business should not get too optimistic as to the potential value of the business. An overly inflated figure may be a red flag that the entrepreneur hasn’t truly understood the numbers properly.
Angel investors will look for the founders and co-founders of any business to be able to justify the valuations that they come to with financial projections, comprehensive market metrics, and competitive research.
Another thing that the angel investor will be looking for is an exit strategy from the business and what that would look like in terms of milestones reached. Whilst angel investing isn’t a short-term project, an angel investor will be looking to make money at some point in the future. Entrepreneurs will need to be able to present what that exit point will look like before receiving any fundraising money.
When putting together a business plan and pitch deck, it is good to remember why the angel investor may be interested in your business, so you’ll need to establish how and when you expect goals and targets to be reached.
There can be a lot of different exit points for angel investors. They may wish to get out at the IPO stage, or they may wish to get out much sooner. Establishing these goals will be important.
Angel investors take calculated risks when investing in startups, and they look for a combination of factors that indicate the potential for long-term success. Founders who can clearly communicate their vision, demonstrate traction, and present a compelling business case stand the best chance of securing investment. By understanding what angel investors prioritize, startups can better position themselves for funding and long-term growth.
Angel Investors are always looking for new businesses to invest in, and when they do, they take calculated risks on that business becoming a success. Experienced angel investors also know that many businesses fail for several reasons, whether that is a lack of cash flow, poor sales, or a poor proof of concept. That is why they will be looking at factors like the people behind the business and will also be looking for a firm understanding of the financials that underpin the business.
Entrepreneurs looking for angel investment into their new business or startup should spend time in the planning stage to ensure that they can provide both a comprehensive and professional overview of how their business will be run and where they plan to take it. Angel Investors will do their due diligence prior to investing and will likely get cold feet quickly if they do not find the valuation they are looking for from a business’s founder.
Entrepreneurs who do the hard work of planning and presenting their business case thoroughly and professionally will be on the pathway to success and will be much more attractive to potential investors.
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