What does angel investors look for?
Top 5 things Angel Investors analyse in a startup before investing
Angels are here. But what it takes to make them interested in your startup?
Lately, there is lot of buzz around angel money pouring in the Indian startup ecosystem. Before embarking on the strategies to raise money from angel investors we need to pay attention to two critical questions. (1) Who are angel investors? and (2) What is their motivation?
By definition, an angel investor is a high net-worth individual who invests at initial stages in a venture. They are called angels because they back a startup at a time when other kinds of investors such as venture capitalists, private-equity investors or banks do not even consider them worthy of investing. Their range of investment is also less than other kinds of investors or financiers. From an angel’s point of view investing in startups give them more control over their investment vis-à-vis investing in capital markets. Hence, their motivations are slightly different from other categories of investors.
Angels are smart individuals who utilise their money wisely in anticipation of higher gains. They add value to the startup by not just bringing capital but also by bringing their experience, skills and network to the table. Every angel is unique. However, they usually cover their risks by analysing startups on certain parameters. A sneak peek into their minds shall make entrepreneurs better prepared for their pitch.
The passion and commitment of the founding team is the first thing which an angel investor looks at. The first meeting is about creating the famous first impression. Passionate entrepreneurs create an infectious connection which gives them a top of the mind recall. Majority of the startups never get pass the MVP (Minimum Viable Product) phase and angels are well aware of that. They prefer to spend some time with the founding team before investing. The primary reason for this is to gauge the passion of the founders. They understand that the sole driving force is the passion of the founders, as during the initial phase success can only be visualised and not realised.
A true entrepreneur solves problems. The second critical aspect an angel investor focusses on is how clear the entrepreneur is with respect to the problem. A thorough understanding about the problem is critical for success of any startup. Angel investors typically pose a list of questions regarding ‘the problem’, such as:
What is the problem?
Who encounters this problem?
How important is this problem to them?
How many people face this kind of problem?
How do people deal with this problem in absence of your product/service?
How your product/service solves this problem? Etc.
Answers to these questions clarify lot of doubts about the thinking and research done by the entrepreneurs. It further gives an idea about the market potential, substitutes, etc. Angels know that the solution may change with time but if the entrepreneurs are clear about ‘the problem’ they have a better chance of coming up with something useful.
First version may be a mock-up, solution demo, prototype or MVP (minimum viable product). Angel investors would like to see the effort of entrepreneurs in action. Someone may have a brilliant idea but if the execution is not visible, the chances of raising investment are slim. A slide deck may not be sufficient for angel investors. Angels love to feel the product or service no matter how crappy the first version is. Entrepreneurs can show a website, mock-up, a video, etc. which can be very close to their real solution. First versions are testament of the effort and proactiveness of the entrepreneur. Angel investors feel confident about the entrepreneurs when they see the first versions.
Skin in the game
‘Skin in the game’ refers to the investment the entrepreneur has herself/himself made in the venture. Angel investors would like to access the skin in the game. What is the opportunity cost for the entrepreneur? How much time and energy has been invested by the entrepreneur so far? Has the entrepreneur invested any capital before reaching out to the angel investors? Has family or friends invested so far? Such questions are important for angel investors. An entrepreneur with confidence would put his/her skin in the game and would approach family and friends for investment. Angels are not interested in the amount of money invested by the entrepreneur per se. Their motivation is to access the seriousness and confidence of the entrepreneur.
Angel investors don’t expect entrepreneurs to be financial wizards. However, they do expect that the entrepreneur understands the basics of financial planning. Angels prefer to do due diligence. When they put money in a startup, they want to make sure entrepreneurs will use it wisely. They usually pose questions like,
How will the entrepreneurs use their money?
How will the money help them and till which stage?
Have the entrepreneurs calculated their costs correctly?
Does the startup have any sales or revenue plan and when will it start coming?
What will the entrepreneurs pay themselves?
These basic questions give an idea about the business readiness of the entrepreneur. After all angel investor is in the business of making money. They would like to put their money before people who understands the value of money.
One should remember that every individual investor is unique. The weightage assigned to the above parameters may differ. Moreover, raising money is a tedious process. Little bit of research about the angel investors before presenting can come in handy. As they say, ‘good preparation is half the battle won’.