Being a successful angel investor requires a lot more than just luck. It is the combined result of experience, great dedication, understanding of core business drivers, the ability to assess potential risks and good old fashioned gut feel. Angels (either consciously or subconsciously) conform to a list of "habits" in order to achieve investment success. Equitise recently interviewed a series of angel investors in Australia and New Zealand to provide some insight to fledgling startup’s as to what is going through their minds when assessing your businesses. Have a read below to see what they said.
When considering an investment to add to their portfolios:
- Due diligence: Angel investors not only have an extensive understanding the core risks associated with startup investment, they also conduct due diligence to mitigate many of them. Despite differing approaches to conducting due diligence, angel investors perform thorough due diligence to increase the likelihood of a profitable investment.
- Diversification: A diversified portfolio is one of the greatest tools of angel investors. As the majority of startups fail, portfolio diversification acts as an insulator against the total loss of capital. Consequently, spreading your risk is the most effective way to achieve a higher overall return.
- Investment criteria: Angels (and early stage VC’s), typically have particular investment criteria they consider when making an investment. If it doesn’t fit, many will walk away. This approach is a great way to mitigate investment risk as it enables investors to assess based on industries and business models they understand.
Characteristics they look for in an investment:
- Kick arse people: You could have the best idea in the world, however without the right team execution can be near impossible. Angels look at the skills and traits of a company’s founders. Having the right team determines the path and outcome of a new venture more than any decision in the lifecycle of a company.
- A scalable business model: Scalability refers to the increase in sales growth attained by a business without adding much in the way of direct costs – for example: does gross margin increase as your business grows? Simply speaking, this is important as it means profit can be amplified when an angel invests capital into top line revenue growth.
- Disruption: Are you changing an industry? Are you making peoples lives easier? Are you saving people time and money? These are all questions that angel investors want to know. If you can answer yes to these questions and provide an intelligent explanation as to why you are going to be making the world a better place, then you will be one step closer to closing that investment!
The biggest deal breakers for angel investors:
- Valuation: Valuations need to be realistic so valuing a startup with no track record, no market penetration and no experience at $10m isn’t going to work. You need to be realistic; if you overprice your business you will lose your credibility.
- The devil is in the detail: If your financials and/or business plan are lacking in detail then chances are you wont get a chance to nut out the specifics of a term sheet. This includes credible references to any claims and references you make in your presentation.
- Original idea: Investors want to see ideas that are innovative. If they can find examples of similar products, you’ll need to have a clear plan for differentiating yourself.
Being a startup in need of cash is not an easy place to be. Try and put yourself in the angel’s shoes, put your best foot forward, and do everything you can to get them believe in your company as much as you do. If you get the basics right (see above), you are well on the way to securing investment to grow your business.