What Angel Investors Want to Know Before Investing in Your Startup
Money moves fast in the world of startups, and business founders need to be ready to seize the opportunity to secure funding when it presents itself.
At the very early stages of the business journey, this means interfacing with investors who have an interest in round-one funding, with an eye on outsized returns. These figures are known as angel investors, and they can truly be the saving grace for a company getting off the ground.
Appealing to angel investors isn’t easy or intuitive, however. Founders need to polish their business plans and present themselves in the best possible light to get the funding they need from angel investors.
Here’s the rundown on what angel investors are looking for, so that your business has the edge when it’s time to get the capital you need and level up.
Knowing the Role of Angel Investors
(Unsplash)
You don’t need an advanced business degree to start a successful company, but you do need to know some of the terminology and tactics regarding funding and early investment.
This means learning the ropes about how angel investments work and how they differ from things like venture capital, private equity, and others.
“Angel investors are really getting in on the ground floor, so to speak. They are taking big risks in companies that may not be fully formed yet, and there’s a high chance of losing all their money. However, if they make the right moves, they have the chance to 100x their initial investment, and change their lives forever. Understanding where these investors are coming from is key to positioning your business in an appealing way.” – Yuvraj Tuli, Founder, Compound Banc
First-time founders should also keep in mind that angel investors aren’t necessarily the bankers and finance figures they read about or see on TV.
More often than not, these are everyday people with extra cash, looking to make moves with their money and potentially earn a big payday down the road.
“The common misconception is that angel investors need to be millionaires, billionaires, or famous entrepreneurs with institutional support. The average seed investment size is under $100,000, not millions. When you get into the realm of venture capital, that’s when you start dealing with bankers and financiers. Finally, private equity will step in at the later stages once your business is profitable with sustainable cash flow. That’s when you can expect big-time investments in the tens of millions.” – Justin Soleimani, Co-Founder, Tumble
Strong Mission and Management Team
(Unsplash)
Even if your company is still in its formative stages, investors will want to understand the fundamental mission of the business to give it any attention.
“If your business idea requires a 30-minute presentation to explain and there isn’t a clear mechanism by which you make money, you won’t see many angel investors in your email inbox anytime soon. The mission needs to be clear, concise, and easily understood. This will take you far even if you’re miles away from profitability.” – Ryan Rottman, Co-Founder and CEO, OSDB
The people you choose to be in your corner also make a big impact when engaging with angel investors. Don’t underestimate the power of rapport and sales skills in this process.
“We’re all just people at the end of the day, so don’t let money or pressure get in the way of making actual connections and treating others well. Investors are used to dealing with scammers and shady figures that can’t be trusted. Simply by being upfront and transparent from square one, you put yourself at a significant advantage in their eyes.” – Sam Sarullo, CMO, Daniel’s Jewelers
Prototypes and Business Plan
(Unsplash)
While some angel investors will be impressed with ideas alone, most will want to see some sort of product prototype or a beta test that shows your concept in action.
“If you show up empty-handed to a meeting with investors and just ramble on about possibilities, there isn’t much for them to grab onto, and that first impression will suffer. That’s why entrepreneurs should be product-focused from the very start and have something to present. It could be a tech demo, sketches, a plastic mold – anything is better than nothing.” – Lionel Mora, CEO, Neoplants
In addition to a product concept, founders should have a loosely formulated business plan to put things in context. Investors need a practical understanding and a road map forward.
“Meeting with angel investors isn’t like going into the boardroom at a huge private equity firm, and it’s more casual in nature. Still, these investors need to know that your idea is legitimate and viable, which means presenting them with a business plan that makes sense. Showing ambition and optimism is crucial, but you’ve also got to be realistic and ready to answer tough questions along the way.” – Alex Carroll, Founder, Caliber Games
There is a wealth of business plan outlines that can be found online, in books, in courses, and through other resources both free and paid. Use all of these tools to your advantage so that you show up to a meeting with investors with knowledge, confidence, and a professional vibe.
Relevant Metrics and Market Research
(Unsplash)
Talk is cheap to angel investors, and the more hard facts you can present, the better your presentation will be received.
“Take the time to make some estimates based on what competitors and colleagues have accomplished in your industry, because unless you’ve already launched your product, it’s all just speculation. Put things in clear terms. Is this a SaaS model, an ecommerce store, a marketplace, a social app – make comparisons to industry leaders if need be. Make projections about recurring revenue and cash flow. Put in the legwork and the market research so that you ground your ideas in reality.” – Brooke Galko, Marketing Coordinator, PUR Cold Pressed Juice
As founders take on more meetings and get immersed in the startup world, they will start learning the language of angel investors and use these terms with more confidence.
“Include key market metrics such as TAM, SAM, and SOM,” said Marjorie Radlo-Zandi, Entrepreneur and Board Member at QSM Diagnostics. “TAM (total addressable market) is the total revenue possible if a product or service were to achieve 100% market share. TAM answers the question of who would theoretically buy your product or service. SAM (service addressable market) is the TAM segment within geographical reach that you can target with your products or services. Lastly, SOM would be the share of the market that a company could capture over time.”
Marketing, Customer Acquisition, and More
(Unsplash)
Beyond the basics of product and revenue projections, founders will need to offer some insight regarding marketing and customer acquisition as well.
As always, these components are crucial to getting a business off the ground, regardless of the industry or specialty.
“It never hurts to show up to an early funding meeting with some basic branding materials, whether it be logo ideas, color schemes, a white paper, or some social media outlines. These are powerful building blocks for a company in the modern era, especially those that will live and die by the sword of the internet. If you’ve got talented marketers and designers on your side, this is the time to let them shine.” – Cody Candee, Founder and CEO, Bounce
In terms of customer acquisition, there is no cookie-cutter solution that applies to every business. Founders will need to get creative and tell investors how they plan to build an audience.
“Everyone talks a big game when it comes to ‘revolutionary products’ and ‘disruptive service models’ but it’s all crickets when the topic of customer acquisition comes up. Don’t let that be you. Show up with a clear strategy to earn an audience and generate a base of dedicated customers. That’s how you stand out from the pack and earn the interest of angel investors.” – Jae Pak, Founder, Jae Pak MD Medical
Going Face-to-Face with Angel Investors
(Unsplash)
It might be slow going at first when trying to get on the phone with angel investors, but eventually, you and your co-founders will find yourself in a meeting or conference call with interested parties.
Aside from the tips we’ve offered so far, it’s vital to create a compelling presentation that gets the key information across, with a bit of entertainment and context included.
“It’s critical to provide angel investors with the information they need in a way that catches their attention – and doesn’t waste their time,” said Serial Entrepreneur Steve MacDonald of MacDonald Ventures. “The best pitches are three minutes or less. Enough to excite and leave a prospective investor asking for more. As a start, most angels typically expect to see a clear tagline. The problem, the solution (your product,) how it works, the team (why you and why now,) total market opportunity, competition, traction, how you will make money, and the ask.”
Investors are known for asking tough questions and holding high standards. Be ready to respond with facts, figures, and confidence.
“Prepare to be bombarded with doubt and negativity, because investors want to poke holes in your plan to see if it floats. It’s not a personal attack, it’s just business. The stronger your business plan and the more self-belief you show, the more likely you will secure that investment and get a good deal that suits everyone.” – Benjamin Earley, CEO, HOLT
The game of angel investing is scrappy and often frustrating, but these insights from proven founders will point you in the direction of success.
