Three months ago I posted Securing Angel Investors in this space. I was responding then to a request that I explain the process step-by-step. But I’m afraid I skipped the first and, for some, the most important step.
Before you begin, it’s vital to determine whether you actually have a solid investment opportunity, regardless of how good your plan sounds to you. You certainly don’t want to waste your time or someone else’s money. The vast majority of potentially successful startups are not going to get angel investment no matter how good their pitch or plan. Simply having a good business that can grow and prosper, isn’t enough. So what is? How do you catch an angel’s eye?
Be realistic. Here’s what it takes to get angel investment:
- It has good growth potential. Angel investors look for businesses that can increase sales tenfold or more over the next three years. They don’t want to share in your profits; they want your company to go public or sell to a larger company, which is how they make their money. That takes major growth. So you need a big market. That means not just numbers in spreadsheets, but a market that the investors themselves will believe in. Angel investors want businesses that solve real problems for lots of people.
- It’s scalable. Scalable means the business grow without the need for too many more services or more employees. Can you easily handle growth without losing quality? Does it take doubling head count to double sales? This might hamper the bottom line. Be sure to keep the future in mind. Angel investors like product businesses, or productized services, not service businesses. They want businesses that can increase sales overnight without increasing fixed costs.
- It’s defensible. Angel investors want businesses that can’t be easily duplicated by competitors. They look for something proprietary, like trade secrets, copyright, trademarks, and patents. First-mover advantage is good but not enough. Is there a secret sauce? Are there barriers to entry? All this makes a business defensible.
- It has a team with experience in management and startups. Risk is always a big concern with startups, especially for the investors. In fact, if you haven’t been involved in a startup or had some form of management experience, it could be close to impossible to find someone to take a chance on you. When you have people on board with startup and management experience, you are creating a team of strong leaders likely to build a healthy, marketable company. Don’t hesitate to reveal a failed attempt at a startup because it demonstrates you have experience and perhaps have gained some important insight.
- It has a believable exit strategy. Angel investors may be willing to help you start your business, but what they get for their money is a share in your company and the only way they make money with that is when they can sell that share of ownership for money; which is what they call the exit. They don’t want to invest in the ordinary healthy company that pays its founders and grows but never sells out.
Don’t kid yourself: If you don’t have all five of these essential qualities, you should not waste your time thinking about angel investment.
If your business doesn’t have what angel investors want, that doesn’t mean it isn’t a good business. It just means you need to change your funding strategy. Look to friends and family investors instead of angels, or commercial business lending, or scale your plan down so you need less startup funding.
Here’s some good follow-up reading:
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