What Angel Investors Look Into Before Investing in a Startup?

By | June 24, 2015
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In today’s dynamic and competitive era, it is not very simple for startups to secure early round funding. The options are quite limited to bootstrapping, crowd funding, funds from family or friends or angel investors. Startups which require bigger and more professional financial investment generally look at angel investors for funding.

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To begin with, angel investors are entrepreneurs with a large amount of personal wealth and generally have their own business or business related experience. These investors are on a look out for opportunities to be an active in new and young startups and devote their time and effort to act as the primary backer of the company. They come in all shapes and size from investing in smaller increments of $5000 too much bigger amounts like $2 billion dollars per deal.  They invest in startups and early startup companies using the high-risk,  high-return matrix. Apart from funds, they act as advisor to the startup and help in industry connections and networking. To gain all this, the startup should first bring the angel investors on board. For that the company should be able to convince the investor, that it is worth invest in it.

Startup founder or entrepreneur should be able to precisely convey the merits of the business idea, show the meaningful market need, the competitive advantages of the company and most importantly the trustworthiness and the credibility of the company. So while pitching in for an angel, it is important for a young entrepreneur to know what they would be looking from him and the company. It has to be noted that no two angel are alike, so the factors discussed below cannot be directly applied on all.

1. Management Team:

Angels are most likely to invest in people rather than just business ideas. It is a real sine non. Different angels have different calibration points on the management. For any investors it would take a miracle to get investment funding out of them, if they are not impressed with the team. Many investors could be heard saying to themselves, “I could do this deal but the CEO will need to be replaced.” So when its most likely that when the CEO cannot cut it then it is highly unlikely for the investor to invest.

Investors give so much of importance to the team because when they invest in a business, they are also investing in the team. It is also important to have a great idea, but the team should have a great team with business skills to execute it. That is why the people behind the business matter more than the idea itself. Investors who are experienced would know too well that the determination and resourcefulness of an entrepreneur that helps the business get through during the difficult times.

Most often, investors would be interested to have at least one of the founders in the startup to have had prior business experience. Investors understand very well that one person cannot be king of all from marketing to technology. So the strength of the founder and the team matters a lot for the investor. Silicon Valley Angel Investor John Rampton from Adogy said, “If an entrepreneur want to make an impression, prove that there’s past experience and credibility behind the team. It’s your team that’s going to win me over, not your half-baked idea!”

2. Complete Business Plan:

It is vital for any startup to have a crystal clear and completed business plan to do business effectively. It become even more important when looking for angel investor. It means that plan has to be clearly structured on the paper and should hold details of everything like what is the problem the company is looking, how it plans to solve, the business model of the startup, market structure, list of competitors, ways to generate revenue.

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The most attractive startups would be able to clearly convey to the angels how they will be able to make money by investing in the startup. And this is exactly what the investors would be interest to hear. Angel investors would want to see a solid business plan that consists of monetization, scalability and a viable exit strategy. They would also want to be part of the board to help in making decisions. So the business plan to have a role for the angels too. It is important for the business to be vetted through market research, surveys or crowdfunding. Angel investors are already conscious and alert of the possible consequences of funding a startup so it’s advised to budding entrepreneurs not to risk their reputations and credibility just to impress them. Any business without a strong business plan is on the way to failure.

3. Valuation:

There may be no magic number for how much an angel invests but the valuation of the company would generally remain the same. Paul Graham says for angel rounds the valuation of the company should not be lesser than the half a million dollars and should not be more than five million dollars. The principle that works with the common valuation is : “If the investor puts in $50,000 into a company at a pre-money valuation of $1 million, then the post-money valuation is $1.05 million, he would get 0.05 or 1.05 or 4.76% of the company’s stock.” If the valuation of the company is very high, it just means the founder has not valued his company right.

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Just like with venture capitalists, talking to several angels would give you more options as to which number to go with. It is important to keep in mind that hitting milestones make a big impact – and can give an entrepreneur a step change in valuation for the next round.



4. Credibility and Integrity:

Founder of the New York Angels investing group and CEO of investment firm Gust, David Rose said the integrity is the foremost quality he would look for in an entrepreneur. He also stated that anything or everything may go wrong when investing in a startup, the only thing that is certain and unchangeable is being able to trust the entrepreneur.

Another angel from Beverly Hills named Dan Fugardi said, “I love to hear brutal honesty no matter what, and a plus if it is tied to past experiences, even childhood, that makes integrity and transparency a top priority. Also you don’t have an answer for everything. If you get an obscure or surprise question no one would logically know as a fact, ask the question back ‘I’m not sure, what do you think?’ This will indicate what decisions will be like once in business together.”

Put in simple terms, it means investors would be interested in investing in entrepreneurs who are thrifty, resilient, determined and passionate. The entrepreneur should not only be able to set goals, lead the team and manage the budget but also get tough when the things get tougher.



5. Market Size:

Due to the easy entry into the markets, there are a lot of startups that flock into market but not everything make it big. Most of them talk about early exits. No matter what the size of the startup maybe, the investors would want the entrepreneur to believe that his company can make it big one day. They may expect him to start lean and then grow up. they might agree that $50 million outcome will give decent returns considering the size of the investment and low price entry to the market. But it has to be noted that almost all angel investors are interested in big markets with big ambitious team. So it is better for the startup NOT to talk about early exits, quick flips, tuck-in acquisitions, previous interest shown by acquirers etc., Also, it has to be understood that just to show it big, it cannot be depicted big rather it has to be documented with suitable evidence and study supporting the argument.



6. Validating the company or product:

It is important for the startups to pitch the business plan. The business model and the idea revolving around the business has to properly validated and scrutinized before entering the market in full pledged speed. The entrepreneur can opt for the conventional and traditional methods like survey and market study but in recent days there is lot of new approaches like crowd funding which are reliable and valid way to examine a product or idea. Crowd funding is well-suited for companies that deal with consumer related products. When the SEC finally releases rules for equity crowd funding, wherein the prospective customer can become the investor, angels will use this as an early filter to find the most promising startups. This could also help the startups to know where they stand and what changes can be done to do better in market.

7. Risks involved:

Startup founder should be passionate, optimistic and hopeful for the future. But it is also important to be realistic. They should also be able to access the risk involved in the business for himself and for the investors to help them both. Generally, angels do not invest in work-at home business, gambling sites or debt-collection types business proposals  for the risk involved in these areas are high. Other businesses that are avoided by the angels are brick-and-mortar retail, restaurants, telemarketing and consulting. Entrepreneurs who force their startup without respecting the motivation and concerns of an angel prove that they do not understand the risks that an angel is taking in investing in their startup.

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