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What do angel investors want from a startup?

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Last editedMar 20223 min read

You can have a great business idea and talented team, but without appropriate funding it’s difficult to get your startup off the ground. Angel investors can be the missing piece of the puzzle, but what do angel investors want from a startup? In this guide, we’ll cover what they’re looking for in an investment.

What is an angel investor?

Angel investors are individuals with a high net worth seeking alternative investments to the usual stock market. They help early-stage companies with financing in return for a stake in the business. One thing to keep in mind is that startups come with a high failure rate – as high as 90% in 2019 alone – which means angel investing is a risky business.

Ultimately, angel investors are looking for startups that will defy these odds. They also look for investments that will yield a higher return than the stock market would, so you need to prove your business’s potential. Typically, an angel investor will offer between $25,000 and $100,000 to startups in the hopes that the small company will be one of the next heavy hitters like WhatsApp or Airbnb.

What do angel investors want from a startup?

Taking the elements of reward and risk into account, here are a few factors that angel investors consider when weighing their options.

1. Return on investment

Above all, angel investors are looking for a high rate of return on their initial investment. They’ll want to know if the business idea fills a gap in the market with potential for significant growth. The product or service should be new and exciting – so you’ll need a heavy-hitting, detailed pitch to sell it.

2. Reliable management

Investors will look at the leadership team in place. Because the business is new, it’s vital that the founders have the skills, experience, and temperament to execute a successful business plan. On a personal level, angel investors want to back entrepreneurs they deem trustworthy and passionate about their ideas.

3. A convincing business plan

Expect to show investors a detailed business plan loaded with key finance terms, marketing strategies, financial projections, and market research. They’ll look at metrics like burn rate, projected growth, customer acquisition cost, and gross margins.

4. Early traction

Before approaching angel investors, you should already have achieved some early buzz or signs of traction. This should include positive press, a successful trial run or beta product with positive feedback from customers.

How involved should angel investors be?

What do angel investors want from a startup in terms of everyday involvement? This will depend on the individual and their motivation for investing. Some will merely be looking for a financial return, but others will believe passionately in the product or its founders. They may be more interested in contributing time as mentors or joining the board of directors. As you approach potential investors, find out what their expectations are in terms of involvement.

At the same time, it’s important to make clear how the investment will be used. During the financing round, you’ll need to disclose your proposed burn rate and capital requirements. You’ll also need to discuss an exit strategy for the investor. Some angel investors will offer direct loans, but most look for equity ownership. As part of the exit strategy, they might sell their shares back to the company founder at a predetermined date.

Tips to attract angel investors to your business

Now that you know what angel investors are looking for, here are a few final tips to make your pitch successful.

  • Target investors interested in your industry and location.

  • Whittle your pitch down to a 20-page deck and practice repeatedly.

  • Offer a product demonstration.

  • Prepare a video of customer testimonials from beta testing.

  • Research the competition.

  • Research potential risks so you’re prepared for the tough questions.

Any solid business plan will include details about sales conversion rates and payments. GoCardless can help, providing high converting payment pages during the checkout experience. These are available in a selection of formats to fit your payment flow. With advance knowledge of incoming payments, both recurring and one-off, you can improve cash flow by eliminating late payments. GoCardless also integrates seamlessly with 200+ partners, including major invoicing software like Xero and QuickBooks. This puts payment visibility right into your startup’s workflow – all reassuring to any angel investor.

By spending plenty of time tailoring your pitch to an investor’s needs and integrating the latest technological tools, you’ll be more likely to secure financing and take your startup to the next level.

We can help

GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.

Article sources

https://www.nationalbusinesscapital.com/blog/2019-small-business-failure-rate-startup-statistics-industry/

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