When creating and growing a business, angel investors can provide you with that much-needed investment, expertise and support.
An injection of capital and knowledge will help get your company off the ground and increase your chances of long-term success. So if you find yourself pitching to an angel investor, you must know what they’ll be looking for from you and your business.
We’ve compiled our top five tips on how to attract an angel investor so you know what to do the next time you pitch.
1. What do angel investors look for in a startup?
For most investors, the people behind the business are more important than the idea itself.
It’s one thing to have a great idea, but another to have the experience and business skills to execute it.
When an angel investor invests, they become part of your company, and they’re not only investing in your business, but they are also investing in you.
Experienced investors know well that an entrepreneur’s determination and resourcefulness get a business through the inevitable hard times.
Often, investors will want to see that at least one of the founders has been involved in a startup or that they have an experienced advisory board with a few grey hairs. They also know that one person can’t be good at everything, from marketing to finance, technology, and legal agreements. So know your strength and build a killer team around you.
If you can’t afford them right now, line them up to start when you have the finance or entice them with founder equity shares.
2. Is there an attractive amount of growth potential?
To secure funds from an angel investor, be sure you can demonstrate that your business has the potential to be worth £10m to £100m in the future.
Investors will only be willing to put their cash and time into a business if the potential upside excites them. This means knowing your market and proving that you’re solving a real problem.
A great way to show growth potential is early traction, a growing and dedicated loyal core of users. This is not always possible without adequate capital but demonstrating traction on a shoestring budget is an excellent way of showcasing market interest and potential.
If you can prove it works in one small area, angels will be able to see how that performance can be replicated on a meaningful scale when you have sufficient funding on board.
Entrepreneurs need to be realistic when forecasting, as outlandish claims that don’t match reality will only put investors off.
Don’t just look at the worldwide market potential and pick a percentage share! Look at how much of the market you can realistically attract and service with your marketing budget and infrastructure.
The more research, evidence and analysis entrepreneurs can find to back up their numbers, the more persuasive they’ll be when pitching.
3. Can the businesses be scaled easily?
Investors are always looking for the next Instagram, Snapchat, or Twitter - they’re looking to make investments in startups that only need a minimum viable product to get to market, which could then scale quickly, raising cash for servers and staff along the way.
If your startup relies on a large workforce or has long sales cycles, it will be hard to scale quickly. If you are active on social media, I am sure you will have come across the following quote.
‘’Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. Airbnb, the world’s largest accommodation provider, owns no real estate. Something interesting is happening.’’
Yes, something is happening, scalability. All the companies mentioned above implement a structure which allows the public to utilise their own assets for profit, with minimum input from the company itself.
Remember, as much as angel investors like to work with exciting new startups and share their expertise, they also want to invest in a company with the potential to deliver a good return.
4. Do angel investors get equity?
Yes, most popular angel investors would instead become a shareholder in a business they are risking their cash and credibility on than simply facilitating a loan.
Therefore, you must ensure that your business is structured for equity investment. In addition (and this is the challenging part), you need to be prepared to give up a percentage of your business in exchange for funds. For example, an angel investor may ask for 5-15% equity in your business in exchange for their investment.
Investors will expect to have a robust Shareholders Agreement in place to protect their interests. They may also want to play an active part in running the business, which can be a huge bonus.
Depending on their business experience and contracts, working with an angel investor can help you strategise for growth and get your products and/or services into markets you would otherwise have struggled to reach.
5. Does a viable exit strategy exist?
Even if your angel investor plans to commit to your business long-term, they will still want you to present several exit strategies and associated risks analysis.
Your pitch must demonstrate chronological details of the return the angel investor will receive.
The two most common types of exit strategies for angel investors are:
- Selling their shares back to the owners of the company, and
- Selling or merging the company
Always remember, angel investors, are in to win, so ensure they are kept updated on the status of their next payout.
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We hope you find these tips useful the next time you try and attract angel investment. If you do agree on terms with an investor, remember to ensure your interests are protected with a Shareholders Agreement.