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
- Previous career in technology, finance, or law
- $50,000-$100,000 to invest in a deal
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
- 1. Can you explain your business — how will/do people use your product — succinctly and clearly?
- 2. Do you have a credible path to revenue? How far away are you from being profitable?
- 3. How big is your market? How many customers/users do you have?
- 4. Have you demonstrated product/market fit?
- 5. How do you rank versus your competition?
- 6. What are your biggest challenges?
- 7. What skill gaps exist in your team and how do you plan to fill them?
- 8. Do you have financial projections?
- 9. How much capital do you need? What do you need it for?
- 10. What milestones have you set for your business?
- 11. What future raises do you have planned?
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
- Practice! Don’t just spout facts without providing context. Use your pitch to tell a story. Lay out the problem you’re solving and why. Then explain why your solution is the right fix. Each slide in your deck should focus on one point, with 10-12 slides max. In the early conversations, and until you have a closed deal, your goal is to get to the next meeting.
- Don’t read your deck. Look for ways to connect with potential investors. The capital raising process may seem rational, but things like whether investors identify with you and non-quantifiable aspects like how good you are at selling, whether you seem trustworthy, have a “cool” product in an industry they have an interest in, or offer a service that solves a pain point for those investors and are also factors.
- Don’t gloss over competitors; there’s always competition if not in the form of a substitute product or service, then for customers’ time and money. Potential investors will want to know what keeps you up at night and what unique value you offer to fend off the competition.
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.
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