What do Angel Investors Look for in Startups?
Angel investors have to look for a business that worth investing, but it is not easy to differentiate between a startup that has a potential to grow and the one that is unlikely to succeed in the future. Angel investments are the most popular form of injecting funds into a business, especially a startup. According to a research, business owners are of the notion that it is a plan that attracts the investment, but investors seem to have other priorities.
Angels go for the “Ideas and Founders” and not the “Plan”
An online platform, known as Company Check that provides data on the companies in the UK, conducted a poll where 3000 business owners were asked about what they think an investor looks for while making an investment decision. It was revealed that around 38 percent of participants said it is a business plan, whereas, 27 percent of them voted for sales figures, followed by the founder, business idea, and economy. But the owner of Company Check, Alastair Campbell, was surprised with the results. He recently got an investment of $1 million for his startup called Carsnip. He said that at an early stage, it is an idea and a founder of a business that angel investors tend to go for, and then comes the sales figures and plan.
To further confirm the reasons, another poll was initiated where investors were asked the same question. Most of the investors shared the same notion as expressed by Campbell. Rory Curran, an angel investor of StatPro and Ecodesk, said that after his experience of investing in about 15 early stage startups and going through failures over time, he believes the ranking should be a founder, an idea, and then a business plan (especially the technology). And then comes the question of whether it is scalable, or if it will need significant reinvestment at a later stage. Similarly, former head of global markets at KPMG and an angel investor, Neil Austin said that he goes for the idea, then founder and then a business plan.
Another investor, Rajesh Sawhney, who has invested in about 50 startups, including Little Eye Labs (later acquired by Facebook), said that he seeks an exceptional founder with ingenious ideas and profound execution capabilities. He believes that angel investing is basically about recognizing and nurturing a unique talent.
The chairman of Wyldecrest Parks and investor, Alfie Best, said that he considers cash flows to be a key factor, but when it comes to investing in startups, the experience of a founder along with the companies that are willing to purchase their products is what he evaluates.
Another angel investor from Silicon Valley, John Rampton, said that for a founder to make an impression, it is important to show that a team is backed by experience and credibility, because he believes it is a team that is going to make an impact and not merely the idea.
High-growth Business is a Potential Investment
Angel investors tend to go for startups with high growth prospects as compared to the ones that are likely to grow at a slow pace with modest profits. They hold their expectations high and seek a higher return than they can possibly get from a stock market. Allan Riding, an expert on angel investing and a professor at Carleton University, said, ““For every dollar that an angel puts into a company, he or she would like to take seven dollars out, after taxes, in seven years.”
An entity is likely to win an investment if it builds a business with sound future prospects. According to AngelBlog, angel investors are more likely to invest at pre-money valuations between $1 million and $3 million. By this point, it is probable that a startup has succeeded in establishing itself as something, having a real customer-base, fair valuation, and real revenues. Moreover, at the time of making an investment, they also look for an exit strategy to take a smooth exit.
Another key factor that every investor looks for is the scalability of a business. They prefer to invest in startups that require a minimum viable product to get to the market and can scale quickly. For example, the largest taxi company in the world, Uber, does not own any motor vehicles. Similarly, a well-known retailer, Alibaba, holds no inventory. These companies scaled very quickly as soon as they entered the market.
It is important for entrepreneurs and startup owners to value the motivation and concerns of angel investors, because these investors take a significant risk when they invest in businesses.