An angel investor is a high-net-worth individual who uses their own funds to invest in early-stage startups. They typically seek higher returns compared to traditional investments, and are willing to take on greater risks to support the development of new businesses.
Since high returns are on the table, angel investors are always on the hunt for startups with unique and compelling ideas. The capital invested and the level of involvement can vary greatly, but one thing is for certain: angel investors are vital to the startup ecosystem.
So, what exactly are angel investors looking for in a startup? Let’s get into it.
Understanding Angel Investors
Angel investors play a crucial role in the early stages of a startup by providing the capital needed to get the business off the ground. In return, they typically receive ownership equity. Beyond financial support, angel investors also provide strategic advice, mentorship and valuable industry connections.
Investing in startups is inherently risky due to the volatile and competitive nature of the market. Statistics show that only 10% to 20% of startups succeed in the long run, and 45% fail to survive past their fifth year [1]. Given these high stakes, angel investors carefully evaluate various factors before committing to a startup.
Criteria for Angel Investors
Here are some key factors angel investors consider when assessing startups:
Founder/Problem Fit
Angel investors prioritize the founders' skills, experience, and how well they complement each other. They’ll try to understand why this particular team is well-placed to solve this particular problem, what insight they have that others don’t have. They’ll want to know who the founders and core team members are, what their vision is, and how they plan to execute it. Essentially, they want to ensure they're onto something good (and that they can contribute in a meaningful way).
Market Opportunity
Market size and growth potential is next. Questions include: “How big is the market for this product or service? What figures support this potential? And in crowded markets, what sets you apart?” Once answered, investors will look for strategies to increase market share, such as improving the product/service, exploring new sales channels and leveraging connections.
Early Traction
Angel investors need more than a great idea; they want proof of early traction. This could be demonstrated through user numbers, partnerships with other businesses or media recognition. Such data shows the concept is viable and ready to scale. So remember: don’t prove that your idea is workable. Prove that it’s already working.
Business Plan
A well-articulated business plan should include financial projections, marketing strategies and market research. Naturally, investors also want to know how their funds will be used, as well as burn rates and exit strategies. It’s about reassuring them that you have a clear path to profitability and the competence to make it happen. Of course when you’re in the very first days of the company, your business plan is not going to be accurate. But by doing one, you will be forced to think about your unit economics, and what is required to make your business work.
Return on Investment
Though angel investors are drawn to startups for a variety of reasons, they are ultimately on the hunt for high-ROI opportunities. As a result, getting them excited about your idea and its potential is the key to securing investment. Convince them that they’re the missing piece of the puzzle, and they’ll be eager to invest.
Involvement of Angel Investors
It's important to note that not all angel investors seek the same level of involvement in their ventures. Given what's at stake for them financially, most take a hands-on approach, spending considerable time with the entrepreneur to help push the business forward (e.g. as mentors or board members).
However, some investors prefer a less hands-on role. These individuals may lack the time to nurture each venture or simply favor a straightforward arrangement of providing capital in exchange for equity. Understanding these differences ahead of time is crucial to avoid a mismatch of expectations.
Key Factors Analyzed by Angel Investors
What other factors are angel investors looking out for?
Risks and Mitigations
Angel investors consider several key risks when evaluating startups.
- Financial Risks: These include poor cash flow management, high levels of debt and the inability to secure further funding, all of which can jeopardize the financial stability of the business.
- Market Risks: Factors such as changes in consumer preferences, increased competition and economic downturns can significantly impact the market in which the business operates.
- Technological Risks: Startups relying on cutting-edge technology face the risk that their technology could become outdated or be surpassed by competitors.
- Legal and Regulatory Risks: If there are doubts about the company's legal right to execute its business plan due to regulatory issues, or if the plan is potentially illegal or misleading, investors should be cautious.
Angel investors can protect themselves by closely examining the financial health of their target companies, staying informed about market conditions, ensuring compliance with legal requirements and monitoring technological trends in the industry.
Strategies to Attract Angel Investors
To attract high-quality angel investors, consider the following strategies:
- Professional Pitch Deck: Prepare a professional pitch deck, structured clearly and concisely. Focus on what the investor seeks to gain, highlighting key benefits and potential returns.
- Product/Service Demonstrations: Showcase unique features and present user feedback from early versions. Demonstrating a working product increases investor confidence in its viability and the possibility of market acceptance.
- Networking: Secure introductions from trusted contacts and leverage networking opportunities. Many deals are made through chance encounters and personal connections.
- Testimonials and Media Visibility: Provide customer testimonials and highlight media coverage. This proves market interest, customer satisfaction and the product's potential for broader recognition and success.
What Do Angel Investors Look For: Key Takeaways
As with most things, if you want to know what angel investors are looking for, it's best to go to the source. Start with our series of interviews with syndicate leads.
Otherwise, follow our outlined steps — understanding their criteria, preparing a professional pitch and demonstrating early traction — and you'll be well-positioned to attract the right type of investment for your startup.
References
[1] https://whatsthebigdata.com/startup-failure-statistics/
[2] https://gocardless.com/en-us/guides/posts/what-do-angel-investors-want-in-a-startup/
[3] https://www.robotmascot.co.uk/blog/11-essential-things-angel-investors-look-for-in-a-startup/
[4] https://thepitch.uk/funding/looking-for-angel-investors-heres-everything-you-need-to-know/
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