More than often young entrepreneurs believe that once they have an idea, it in itself is sufficient enough to acquire that Business Angel (BA) investment to get to entrepreneurship Level 2; and while BA’s typically provide billions annually in early stage funding to young companies, they also have a number of set criteria that will indicate the investment readiness of those companies that come across their table.
But what are those criteria? This is what you’ll find out in Angel Investing 101.
Management Team – First and foremost, BA’s look for teams of high-quality entrepreneurs with a track record of leadership and performance in either the specific industry the start-up plans to operate in, or in previous ventures. This also includes the ability to inspire confidence in all the stakeholders, current and future within the company, and finally malleability. Meaning, is the team a pleasure to work with, is it comfortable to receiving
Market opportunity – Do you address major problems for significantly large target markets (i.e. a $100+ million market). The startup has to have a strategy to claim a large share of the market, and while criteria differ between Angel groups, a good target to shoot for is 20%.
Growth potential – Grow quickly and scale is the name of the game here. The company must demonstrate plans to generate sufficient revenues beyond the scope of an initial product offering. Does your startup have multiple revenue streams? How about well conceived financial projections, on what assumptions, and how about cash flow growth and consistent profits?
Competitive advantage – What is it that distinguishes you from the competition, and/or provides barriers to entry for that competition? But what conveys competitive advantage – it includes IP (intellectual property), it’s protection, exclusive licenses, marketing and distribution, & scarce human resources among a handful of other things.
Technology – Let’s face it, Angels prefer to invest in new 1st of a kind ideas rather than augmented concepts of proven products and services. Yet, the technology is not everything, does it have application, is it verifiable? Highly esoteric concepts will be more often than not – treated with caution, and especially if they don’t demonstrate a clear path towards commercialization. Remember, just because it’s new, doesn’t mean it’s good business. Newton anyone.
Use of proceeds – The money invested will be used to accelerate business activity within your startup in order to achieve key milestones and increase the overall value of the company. Funding will often be directed towards R&D activities, sales & marketing, and hiring key personnel.
Exit strategy – Think return 30x, however many angels will invest in a 10x return within a 7-10 year time frame. But how do you attain a 10x return that depends largely on your exit (sale), be it through future funding rounds (VC), sale to a larger industry player, or perhaps IPO. When writing this part of your business plan, be sure to research your industry and look at current trends, everyone wants an IPO or a sale, but sometimes it’s just not feasible.
Fit – Remember that Angels are more than just investors, they are individuals with ample executive experience in a number of fields who will actively coach and help you and your company move forward and succeed. If that personal fit isn’t there, the advice and help you will receive will be greatly compromised and henceforth most Angels tend not to invest in companies where they don’t see a fit happening.