So, you have a meeting with an investor, you should probably know exactly what investors are looking for before your meeting. Talk to any entrepreneur, and they’ll tell you that the number one goal they have is to grow their business. When it comes to creating and growing a business, one avenue for getting a critical dose of investment, expertise, and support is by getting a round of funding from angel investors.
Angel investors are individuals or groups that invest in early-stage or startup companies in exchange for an equity ownership interest. They are the secret weapon of entrepreneurial growth in the U.S. and the amount of active angel investors in America continues to grow—in fact, the Small Business Administration estimates that there are more than 250,000 active angel investors in the U.S. and they fund about 30,000 companies every year.
The successes of individuals like Jason Calacanis or the growth in popularity of TV shows like Shark Tank have only added to the allure of angel investing. Even innovative platforms like AngelList have made the very idea of investing in startups accessible.
We’ve all heard the stories of entrepreneurs that close a seed round of funding in a few days and then ride the hockey stick up to an IPO. Unfortunately, that’s not the norm or even a very likely story. It’s tough out there for startups—according to the Bureau of Labor Statistics, approximately 20% of new businesses fail during the first two years of being open—and there is no real shortcut to getting that much-needed funding.
That being said, an injection of capital and expertise will help get your company scaling quickly and can increase your chances of long-term success, and there are a few things that entrepreneurs can do to increase your chances of getting funding. So, if you find yourself in a position to pitch to an angel investor, here are some of the vital things investors will be looking for from you and your business.
1. Product Market Fit
One of the first things to consider is whether or not this product or idea will indeed have a place in the market. Is the market already overrun with the exact same solution, or will it provide a new and better solution? If the market already has similar products, how does your product or service diversify?
Ask the question “Is the idea solving a real market problem?”. Make sure that you understand what the challenges are that your customers are seeking to solve and the pain points that your product solves. Here are a few things that you should focus on defining:
- Know your target customer: use market segments to define your ideal customer
- Gather intelligence: dive into your market research and interview your sales and marketing teams to identify customer needs.
- Focus on a vertical: with small budgets and short runways, startups need to be able to focus their efforts and grow that area before diversifying.
- Define your value proposition: What problem do you solve? Don’t lose sight of it as you continue to grow your product or service.
The other aspect of this is to figure out if people are already solving this problem themselves or if the idea is useful enough to make solving the problem easier. Do people WANT to solve this problem? What you may see as a problem could potentially not be a problem to anyone else in the market, so pay attention to details like this before you jump in.
Unfortunately, even if your idea does solve a problem, there is a chance that people won’t yet be receptive to the solution. Timing is everything with a startup.
Think through the timing logically. Will this idea be a luxury solution that only a few select people will want or need at the time, or would it be of interest to many people?
On the other hand, you could be presenting a solution that many people will want. Maybe if you’re lucky, your product or service will be so well received that word-of-mouth advertising will be all you need.
Either way, a solid marketing plan is needed to figure out how you’ll educate your target market that it’s the perfect time to take advantage of your solution.
Here’s a real-world example: back in 2012, I spent some time in a Silicon Valley group where we focused on the future of eCommerce and advanced transportation technology. We discussed how advanced payment technology, like virtual payments and smartphone-based payments, could make eCommerce more efficient. Additionally, we talked about the future of transportation and how “smart cars” would revolutionize transportation and distribution channels.
While these technologies may seem normal these days, in 2012 people were just starting to use e-commerce more actively. Smartphone-based payment systems and AI-based transportation were ahead of their time.
Sure, some people would have jumped at the early version of a Tesla, but the market was ultimately not ready for this idea. The timing was off. The technology wasn’t quite there yet–and we still lacked software and infrastructure, not just for cars to integrate these payment systems with stores. It just wasn’t ready.
3. Market Size
Market size is a crucial factor to consider, including the Total Addressable Market (TAM) and the Serviceable Addressable Market (SAM). It’s all too easy to get excited about an idea, and even convince some friends or investors that it’s a good idea as well. But sometimes, our excitement blinds us to the real impact of the concept. But how many more people out there will feel the same way about the product or service?
The thing about angel investors is that they are making investments in several companies at the same time, expecting a relatively quick return ( usually about 2 to 5 years) —once a company goes to market, they expect that it will be adopted quickly and permeate the target audience.
Some questions to ask:
- How many people does the market represent?
- How many of these can we actually reach and influence to buy?
- Will this solution or idea even apply to very many people?
- Can we reach critical mass?
- Is it worth the cost and effort to reach the serviceable market?
- Exit Strategy
Part of the investment process is a plan for the exit strategy. It’s important to think of contingencies, like what happens if the investment fails, what happens if there is follow on investment, what happens if the startup is bought, merged, or IPOed?
Every company has different potential, and not everyone has dreams of going public, so it’s important to understand what path you want to take and present that to your potential investors. Every angel investor has a different idea of how long and how in-depth of a stake they want to take in a company, and it’s important to align that with a company’s plans.
An idea is only as good as its leadership. Of course, the founder is incredibly essential, but leadership goes beyond that one individual. A startup is going to have challenging goals and deadlines to meet. They need a phenomenal team to get everything off the ground. An exceptional team means remarkable leadership and planning in every area of your company. This is a key factor that investors are looking for. Have you ever heard that investors invest in the leaders and not the company?
A few things that angel investors look for in a leadership team:
- A team with an array of skill sets
- A team that works well together and communicates effectively
- A team that’s dedicated to working hard and making the startup a success
- A team with previous experience working with a startup that has been successful
Angel investors “don’t bet on the horse, they bet on the jockey”. Investors focus more on leadership than on the startup idea because a great team and leaders can pivot based on market factors to try and steer the startup to success.
6. Detailed Business Plan
Every business regardless of what they are selling needs a business plan. Whether you’re looking for investment, a loan from a bank, or even just general organic growth, a business plan will be essential. At the very least, a business plan shows that the leadership is thinking about all the contingencies and costs associated with the business.
There are various things that a business plan needs, but here are some of the basics that a plan should include:
- Executive summary
- Full Company description (not to be confused with product description)
- Product and service breakout, description, and detail
- Market analysis
- Strategies and enactment
- Organization, management, team development
- A financial plan, with financial projections
- Risk analysis
The Difference Between Angel Investors and Venture Capitalists
Angel investors and venture capitalists are often considered the same thing, but the truth is they are different.
For starters, venture capitalists continually invest more than $3 million and very rarely under $1 million. They have a number of limited partners they need to invest for and are interested in larger positions that make sense and the kind of returns that they are looking for. Their time frames are usually around a decade or even more. VCs usually get involved with a profitable startup around the series A level.
Angel investors usually invest personal money on startups they feel are promising. They take the big risks to see which startups will grow and move forward and which ones will fail. An angel investor’s risk profile is usually much higher since they invest at a much earlier stage. An angel investment timeframe is usually 5 years or less, are willing to get in on the seed round of funding and are often pretty involved in the startup often as an advisor or mentor. Angel investors will try to keep an equity stake so they can get bought out at a premium when the time comes.
In addition to angel investors vetting your business, you should vet them as well. Do your research and find out just what the investors require and their common business practices. Ask for references from their portfolio companies and reach out to those companies to find out how the process has been and whether they would do it all again.
How to Stand Out from the Crowd
Angel investors are different across the board. Most of them have different things that they specifically look at or different qualities that will impress them. While it’s hard to pinpoint exactly what to do to ensure your angel investor is impressed, here are a few things you should start with:
- Know your customer’s problem and solve it
- Keep it professional but relatable
- Believe in your ideas and don’t back down easily
- Be familiar with your business plan, work the numbers, and know the data
- Be realistic in the concept and the potential
- Do your research on accepting investment from an outside party
Conclusion- What do investors really look for?
Angel investors want to see a clear-cut plan, a good-sized target market, and a sound way to market the product or services to that target market. They want to learn every detail you can share on the product or service and how it fits into the market and the specific problem or set of problems your product or service will fix.
But ultimately, angel investors want to be able to trust the startup team, see the vision in what they are trying to do, and have a gut feel that the venture has good odds of turning a profit. You will have to prove yourself to an angel investor before they simply dive in. Remember this is your concept and you need to own every last bit of it before you can expect them to help you build it. Angel investors are taking a risk in your business by investing, so it makes sense that you take the time to show them your vision clearly and passionately, so they buy in as much as you