Angel Investing 101

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{abb65e2b6815f549a727af2ea9f3a377a727ddc064972a198a74f88a6b766686}.

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.

What makes a good Business Angel investment?

Something to the effect of 80{abb65e2b6815f549a727af2ea9f3a377a727ddc064972a198a74f88a6b766686} of Angel invested businesses go under, and when looking at angel investor activity from those individuals who have been actively investing in the industry the rate drops to approximately 60{abb65e2b6815f549a727af2ea9f3a377a727ddc064972a198a74f88a6b766686}. meaning, 2/3 investments will fail even under the guidance of experienced investors, and 4/5 as a whole. Quite the number.

Every single investment requires the following three things to be in place, if any of these are missing chances are that the investment will fail. These three things are.

1. A great business idea
2. A great management team
3. A great mentor

If any of these three factors is lacking, chances are that the business is unlikely to succeed, and an established angel investor would be wise to keep their money in their pocket until the sartuppers manage to make any one of the weakened factors rock solid.

Mind you this type of feedback will only come from good angels, as they will have the ample experience necessary to critique and analyze the idea. A new Business Angel may become influenced by the energy of a new entrepreneur who wholeheartedly believes in his / her idea, and like others in the general vicinity of the BA too becomes enamored with the idea.

As an entrepreneur yourself, you have to look at the BA’s you’re pitching too and working with, and seeing if they see you and your business objectively or if they’re just another member of the crowd jumping on the bandwagon. Mind you as an entrepreneur this is a very difficult task, as you’re probably thinking your primary goal is securing capital to help in delivering your business to the next level, and while in part that’s true, the greater picture is that as an entrepreneur, you should be more concerned with ensuring the success of your enterprise – rather than running after the first buck.

Oftentimes, BA’s will also say that that they would rather back a good team rather than a good idea, this is preposterous – any good team will only go so far with a mediocre idea and never provide the 30x returns that any BA should be looking for, these are not the risk takes that will back the next big thing, and if you’re idea is truly cutting edge, you’re chances with these folks are slim.

The good and successful BA, will remain cool, and over a period of weeks maybe a month to three decide if the proposal is right, it’s the right business idea, the right management team, and has the right mentors to see it grow, the business angel, will also know the market and understand the current business environment.

Ensuring your BA holds all these characteristics chances are you’ll wind up in the 44{abb65e2b6815f549a727af2ea9f3a377a727ddc064972a198a74f88a6b766686} of well thought out investments that actually make it, and when dealing with BA’s, it’s like anyone else, a give and take relationship.

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