Why Angels Invest
Angel investors finance entrepreneurs for many different reasons.
- First and most importantly, angels are looking for a great return on their investment. Knowing that the likelihood that a startup will fail is so high, angels engage in this high-risk type of investment as the rewards of a startup succeeding are also very high. Angel investors can expect an average annual return of 26%, but they also believe that one third of their investments will result in a substantial capital loss.
- Second, an angel will sometimes back a company because they trust the entrepreneur behind it.
- This, they believe that they can be a valuable resource and give the startup advice and knowledge that will help it succeed.
- Fourth, many angels are past successful entrepreneurs themselves and either feel like giving back to others in the same situation that they were once in, or they would like to be part of the entrepreneurial process again without starting their own company.
- Finally, many angels invest in companies for the thrill of it. They love taking chances with their money and see investing in entrepreneurs and startups as a higher-risk game with more hands on interaction than the stock market.
What Angels Expect
Like venture capitalists, angels check to see if your company can be liquidated quickly and for a big return before they finance your company. On average, an angel investor will get about a 30% return on their investment. Therefore, a startup needs to show that it can be bought by another company or be put up for public offering so the investor can get his or her money back. An angel investor also checks to see if you have a strong management team, a good exit strategy, that the market opportunity is large, and that your asking price is not too high.
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 full potential. As a former entrepreneur, your angel will want to provide you with their feedback and expect you to be receptive to it.
Aside from the personality of the entrepreneur, there are a variety of other things that an angel may be looking for. They will want to see that an entrepreneur has invested their own money into the company, which is a sign that the entrepreneur believes in the idea enough to risk their personal finances on it. The angel also does not want to hear an entrepreneur claim that they have no competition, because any angels know this is simply not true. Angels want to be assured their investment will be used 100% to grow the company, rather than pay any outstanding liabilities or large salaries for the entrepreneur.
Angels will be wary of a company that is heavily dependent on licensing, because it adds another layer of unpredictability to the deal. An angel will also look unfavorably on a company that does not have any external board members on either the board of directors or board of advisors, as this is a sign of hesitancy to accept objective advice.