Very early-stage start-ups at the idea stage choose to secure funding through bootstrapping and monetary support from friends and family. Once they have developed and tested the product or solution, they seek Angel investing, which is the most sought after form of entrepreneurial finance.
Angel Investors are high net worth individuals who provide private, early-stage capital for businesses. They function individually, or in groups and networks. No two Angel Investors operate the same way and investment varies from the type of deal, industry, company stages, to investment sum.
To stand out amongst the countless pitches Angel Investors receive, start-ups need to invest time in understanding exactly what the investor is looking for. Start-ups need to demonstrate the merits in their idea or product, prove competitive differentiation, identify a market need, and also convince investors with an exceptional, trustworthy team.
A Solid ROI
Angel Investors are like any other investor when it comes to ROI. They look for high returns on their capital invested, which coincides with high risk. Start-ups need to recognize the importance of monetization and also maintain the sanctity of the company’s vision and growth.
Start-ups should demonstrate the marketability and profitability of their product or service. Not only is it important to project high growth and ROI, but it should also be realistic and backed by planning.
A start-up gets an upper-hand by setting realistic goals, meeting the goals, then exceeding them, and rewarding the investor.
Angel Investors would be interested to study the annual accounts of a business, including the balance sheet, income statement, cash flow statement to assess the potential in a start-up, and their expected ROI.
As an entrepreneur, you should be aware of important metrics like Annual Recurring Revenue (ARR) and Monthly Recurring Revenue (MRR). A steady ARR ensures that the product has a constant demand in the market that can be tapped into further.
The company’s financial statement, projections, and Return on Investment (ROI) become the key financial metric for investing in a start-up.
High Growth Potential and a recurring income
What makes your product/service unique and profitable in your industry?
Most start-ups enter existing market places, which makes product differentiation an important factor to consider for investors. Most investors are looking for a business opportunity with high growth potential, a significant market share, and wide reach.
As a start-up looking for investment, you need to overcome the urge to amplify or exaggerate your profitability and be transparent and upfront regarding scalability, the risk involved, and a viable exit strategy. This is because Angel Investors are already aware of the risks and consequences of investing in an early-stage start-up. Entrepreneurs should not risk their credibility and reputation to impress.
Angel Investors will conduct their share of Quantitative Research and consult the company statistics and financial documents to figure out how the business is performing, who are the competitors, and what is the potential risk. They are looking for a start-up that has an edge over competitors regarding the business model, management, operations, value proposition, etc.
A trustworthy team
The number of people in the team doesn’t matter as much as sufficient key employees covering the most important areas. Ideally, a team should have experts in the technology or industry that the start-ups seek to enter. Angel investors are very keen on backing people with leadership ability and a drive to make the business possible.
A well-rounded management team led by competent, trustworthy leaders is key to bag an investment. It becomes important to choose business partners with complementary skill sets that will fill every management need, from accounting, operations, R&D, promotions, etc. Angels are not simply investing in a Business Model or a promising product, they are investing in people.
Investors are very keen on investing in an industry that’s ripe for disruption. More than ever, now. The start-up sector has seen immense change post-COVID-19 where investors are attracted to potential growth in industries like online Education, online healthcare, virtual workspaces, blockchain, etc.
Start-ups should keep an eye out for investors who are also industry experts or are interested in investing in your specific niche. An investor is keen on investing in industries where they have the upper-hand in terms of knowledge, information, and interest.
This will not only provide start-ups an edge in the selection process after they have received funding, but you can also expect guidance and expert advice from your investor.
Investing in a start-up is a high risk, high rewards bet. A start-up should have a prototype of the product already in place for the Total Addressable Market (TAM).
A viable exit strategy
Investors expect to be presented with several exit strategies for their investment and comprehensive risk analysis for each of these strategies. Even high-risk takers need to understand how they will reap a return, and the short term and long-term risk involved.
For example, a common exit strategy is the sale of shares to a company’s principal for investors who hold the shareholder position. Investors need to know that an entrepreneur has developed operating policies and procedures to ensure that the investment is not wasted, and ensures a return.