There are several factors that an Angel investor will analyze when considering an investment opportunity. Some of the more obvious factors include: the product or service, the business plan, the founding, intellectual property, market validation, and the investment itself. In addition to these factors, there are some less obvious reasons that will make an Angel investor pass on a deal. We’ve highlighted some of these reasons below:
1. Breach of Trust or Confidence
Nothing will turn an Angel way faster than untrustworthy character. Stay clear from misleading comments, pretending to know answers that you don’t, or showing any sign of flaws in integrity. While investors expect some amount of hype, don’t go so far as to lie or be unrealistic about your assumptions.
2. Lack of Homework
Most Angel investors are as sharp as a tack. They come to the table ready to quiz you in order to find a flaw in your business. If you haven’t don’t your homework and your either not able to answer their questions or have not provided the information they need to assess your business they will be sure to walk away. Additionally, an Angel will find it disrespectful that you are asking for their money when you haven’t done your due diligence to make sure it’s a sound investment.
3. Financials Do Not Pass the Smell Test
Yes, Angel’s want to see hockey stick revenue numbers. But, you must also paint a plausible picture based on realistic assumptions. An Angel investor should be able to clearly see the growth drivers that defend your revenue projections.
Entrepreneurs often underestimate their expenses or their run way before breaking even. Angels are cautious not to underfund a startup as this will cause them to write additional checks down the road or bring in new partners which will dilute their stake. There is a tendency to request less than what is needed in hopes of raising the potential to raise enough capital to get the project off the ground. This is a losing strategy and Angels know it. An Angel investor would rather provide no funding at all than underfund a company.
5. Unrealistic Valuation and/or Investment Terms
Angel’s will often start by asking how much capital you are seeking and for what stake in the business. They do this because if your valuation and/or investment terms are so far off from what they are seeking, it won’t matter how good the rest of your pitch will be as you’ll never be able to come to an agreement. You valuation is not based on what you think the company can achieve with their capital investment. Your valuation is based on what you have achieved to date. An idea is only worth so much. What raises your valuation is technology, your management team, your business plan, paying customers, etc.
6. Unclear Exit Strategy
Angel investors are looking for startups that have the potential to provide a large ROI. Angels realize their ROI during a liquidity event. The exit strategy is the entrepreneur’s opportunity to demonstrate what a probable exit looks like, when it will likely occur, and what type of return can be expected. One of the bigger mistakes that an entrepreneur can make is to neglect the ultimate motivation of a potential Angel investor: a large return on their investment.
7. Incomplete Management Team
Angel investors heavily weigh the importance of the startup team when evaluating an investment opportunity. The reason is simple, the company will face adversity, things will go wrong, and the plan will change. But, if the right team is in place the company can overcome the adversity, fix the issues, and adapt the plan. You should plan on having a team member, service provider, or advisor for every part of the business other than your area of expertise. For example, if you are a tech expert launching a mobile app, you will want a team member, service provider, or advisor fulfilling the following roles CEO, CFO, sales, and marketing. At this stage, it is fine for one person to fill several roles so long as they have the expertise to fill these gaps at their fingertips.
8. Outside of Their Portfolio
Angel investors usually have an industry profile that they feel comfortable investing in. These are typically industries that they have experience in as well. Angels are sensitive about the industries they invest in for several reasons: 1) they want to be able to add value to the companies they invest in; 2) they feel more comfortable evaluating the market need and potential for a new company in an industry they are familiar with; 3) investors can identify growing markets that they see have a large potential and target companies within those markets. Don’t set yourself up for failure by approaching Angel’s with investment portfolios that are outside of the scope of your startup.
9. Inexperienced Founder
While some Angel’s will invest in first time entrepreneurs, many Angels don’t want to take that risk. Although it is best to have a proven track record of successfully launching one or more startups, this is not the only way to show entrepreneurial experience. Having worked for other startups or launching a new department or initiative for an established company can also show entrepreneurial prowess. Alternatively, you can bring on a partner or team member that contains this experience.
10. Lack of Follow Through
Angel’s want reliability. If you promise to follow up with additional documentation, research, or a phone call – do it. If you drop the ball on something now, it’s a pretty clear indication that you won’t deliver on your promises in the future.
Passion and coachability are two personality traits an angel is looking for in an entrepreneur. With passion, an entrepreneur will be able to see and keep their eye on the end goal of success, and has the belief in their idea to see it through the tough times without being derailed. However, the passion must be balanced with an ability to accept advice and guidance and to not be stubborn with a piece of your business that is not working to its full potential. Angels want to provide feedback and expect you to be receptive to it. If you show signs during the pitch that you are not coachable and open to their feedback, they are likely to pass on the deal.
Want To Learn More?
Download our free Raising Capital from Angel Investors eBook.
This guide will walk you through the process of obtaining seed capital for your startup. This book includes:
- An overview of the angel investor process and who they are
- The milestones angel investors look for when evaluating your business
- Strategies for finding the angels best fit for your startup
- How to nurture the relationship, prepare for the meeting and deliver the pitch
- Rounding out the details and preparing for the future