Often times, entrepreneurs get rejected from Angel after Angel because they neglect to understand the essential components that appeal to Angel investors. Regardless of how solid the product or service is, if an entrepreneur does not consider the following fundamentals, they’ll find it difficult to attract Angel investment:
- Type of industry
- Company’s stage of development and capital requirements
- Geographic location
- Management team
- Sustainable competitive advantage
- Exit strategy
Business owners can greatly increase their chance of raising Angel investment by researching a prospective angel’s investment profile in regard to the 5 fundamentals above.
Type of Industry
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.
Company’s Stage of Development and Capital Requirements
In addition to having an industry profile, Angel investors typically have a stage and capital requirement profile for their startup investments. Angels are interested in building small, seed stage companies into moderately sized businesses with strong ROI potential. Startups that require large amounts of capital will likely not provide the level of ROI that will make the investment worthwhile to an angel. With that said, Angels will often pool their investments in order to invest in the companies that require $500K to $1M without assuming too much risk. When determining which Angel or Angel group is appropriate for you and your startup, it is important to understand the stage of development and capital requirements that the target Angel feels comfortable investing in.
As a general rule of thumb, Angels like to invest locally. The primary reason for this preference is convenience. By investing close to home, Angels can visit their startups, convene with management team, and monitor the overall investment process. Additionally, from the procurement side, it is easier for Angels to source deals from referrals that they see on a daily basis and therefore have developed a higher degree of trust.
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.
Sustainable Competitive Advantage
Many first time entrepreneurs ruin their chances of raising Angel investment by shying away from the competitive landscape as opposed to using it towards their advantage. It is very rare that a startup raises capital without clearly defining the competitive landscape and showing how the startup’s solution presents a clear competitive advantage beyond others in the market. Investors want to know how your competitive advantage is sustainable and how it will keep competitors from copying an advantage that you have discovered.
As mentioned previously, 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 entrepreneurs opportunity to pitch a clear strategy to an Angel that highlights 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.
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