How Do Angel Investors Make Decisions?

How Do Angel Investors Make Decisions?

In some ways, getting your startup funded has parallels with The Amazing Race. It can seem like a long, winding, obstacle-strewn course. Kevin Smith of SEEDCHANGE shared his insights with us on what it takes to hook angel investors.

Profile of a typical angel investor

Kinds of companies angels invest in

Angels typically look at several dozen startups a year, but given the size of their investment, they usually focus on early-stage tech startups mostly in the areas of cleantech, technology, and fintech.

They are interested in whether or not your business solves a problem. In terms of investing criteria, they also want to get a read on the quality of your management team including: backgrounds, domain expertise, track record, and how cohesive you are. They’ll want to know what’s unique about your IP and the specifics of your product and business model.

How long does it take to raise angel funding?

A successful raise of, say, $500,000-$700,000 might last six months and definitely takes some upfront planning. Do your research to identify 100-200 potential investors to target. They should be ones who would have an interest in your sector and what you’re doing. Then work your network to get introductions. If your network is limited, do what you can — from joining a coworking space to applying to an accelerator program, to getting involved in pitch competitions and industry groups — to expand it.

Treat your raise like a full-time job and plan to give it your focus! If you’re really successful (and lucky) you might get meetings with half of the investors you target; and eventually after 6-10 meetings (each of which involves follow-ups and requests for additional data) land funding from maybe 10% of the initial 100-200.

Ready to raise? — A Startup Checklist

If you don’t know the answers to all of these, you need to seriously reconsider whether you’re ready to raise.

How to Pitch Your Startup

If you start getting questions about milestones, the amount you’re looking to raise, and who else is investing in your deal (investors have a herd mentality), the people you’re talking to are seriously considering making an investment. Which leads to…

The Valuation Discussion

The bottom line is that the value of your business is what someone is willing to pay for it. There’s usually not much negotiation at this stage anyway. Early rounds are most often funded with convertible notes, which allows for a postponement of extensive discussions on valuation.

What are some determinants? Comparables, market conditions, sector, and traction all play a role. Geography is a factor too. Though you don’t necessarily have to move to Silicon Valley, there’s still clustering of resources in certain markets (e.g., LA for media tech and New York for fashion and fintech).

Don’t get overly worked up here. The goal is to get to a number that feels fair to you and to your investors. But watch out for investors who are really aggressive in negotiating the cap. They are probably not the right ones for you.

Deborah Adeyanju is Content Strategist & Social Media Manager at Early Growth Financial Services (EGFS), an outsourced financial services firm that provides small to mid-sized companies with day-to-day accounting, strategic finance, CFO, tax, and valuation services and support. Prior to joining EGFS, Deborah spent more than a decade as an investment analyst and portfolio manager with leading financial institutions in New York, London, and Paris. Deborah is also a Chartered Financial Analyst (CFA) charterholder.

What business functions have you considered outsourcing? Tell us in the comments section below or contact Early Growth Financial Services for accounting support.

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