What do angel investors need to see before they are ready to invest in your startup? That’s always a tough question to answer, because angels are unique individuals with different priorities and different processes for due diligence.
Some invest primarily based on the strength of the team. Some focus on particular markets or technologies. Some focus on particular social causes, and may be willing to accept lower returns because they want to support that cause. Some are very analytical and do extensive due diligence. Some don’t. And the differences go on…
So what’s an entrepreneur to do? Some of these issues don’t come to the forefront until you actually start your raise. For example, if your startup concept supports some particular social cause, it’s certainly a good idea to start by looking for angels who are passionate about that cause as part of your ‘sales qualification’ process.
But what preparation should an entrepreneur do before starting to raise a round? With all the caveats mentioned above, it’s still safe to say (for at least the majority of angels) that angels are looking for:
- Evidence that the opportunity represents a big enough potential return to be worth the risk – because smart angels know that most of their startup investments will deliver little or no return, so they need to believe there is a chance that one or two investments could deliver a large return, providing a positive (and reasonable) return on their startup portfolio.
- Evidence that the startup team is doing the right thing to reduce the investment risk to an acceptable level. That means reducing at least 5 kinds of risk:
- Market risk: will customers buy it?
- Product risk: can the company deliver the product? Will it meet the need?
- Team risk: is the right team in place to meet the next set of milestones, and does the team have the ability to recruit the talent they will need in the future?
- Finance risk: are the capital needs of the company realistic for angel and VC financing? Does the team have the financial management ability to responsibly manage company finances?
- Legal risk: has the team done the right things to reduce legal risks to the company and the company’s intellectual property?
That’s probably a list you’ve seen before – and the devil is in the detail. Addressing all of these issues comes down to the team ‘doing the work’ to convince investors that the potential return is large and the risk is manageable. Doing the work tends to be a lot more effective than saying “we haven’t done the work – but you should trust us…”
So the operational question becomes: what exactly is the work to be done to present a persuasive story to an investor that the factors listed above have been addressed? I’ll tackle the first one – providing evidence that the investment represents a large potential return – in the next post.
And we’ll be tackling all of these questions in the OTBC ‘What Angel’s Want‘ workshop on May 11, and you’re certainly invited to join us. We’ll go through a detailed list of the work you need to do to address the above issues. Register now.