Angel investors are often the primary investors in a new start-up. The growth of other angel investors in the start-up world has been significant. The feats of big names like Facebook, WhatsApp, and Uber have people rushing to invest in start-ups. An angel investor typically is a successful business person who are wealthy individuals. They are willing to overlook the fact that the business has a risk attached to it and invest in early stage startup who are raising money. Profitability has also increased significantly over recent years. Keiretsu Forum, which is a group of angel investors, has been leading this growth for four years consecutively, as seen by Pitchbook rankings. In this post, we talk about the top twelve things that founders should know before they look to raise capital from angel investors.
1. How much do angel investors invest?
Most angel investors typically invest anything between $25,000 to $250,000. Some investments could go higher than this range, in certain cases of early stage.
2. What to keep handy before approaching an angel investor?
Typically, an entrepreneur would need to have the following things ready before meeting an angel investor:—
- An elevator pitch
- A two-three page executive summary
- A pitch deck
- A business plan
- A detailed financial model
3. What are the key criteria that angels looks for in a start-up?
- Strong management team
- Clear demand and market for the product/service
- Working prototype
- Early traction and customer validation
4. Where can I find angel investors?
There are several online sources for angel investors. Some of the more famous sources include:
- Crunchbase
- Angel List
- Seed Invest
- Angel Investment Network
- Venture capitalists and investment bankers
- Crowdfunding sites like Kickstarter
5. How long does an angel investment round typically take?
The duration it takes to close a round normally varies depending on the angel investor and the angel capital, nature of investment, and extent of due diligence and paperwork involved. Whereas raising capital is usually time-consuming, early on, founders have other things to do: hiring, marketing, building a product. In our experience, we normally see that the typical round takes about 3-6 months to close—that is, from your very first pitch to an potential investor or venture capital until money starts appearing in the bank.
6. What are the five most important things for angel investors?
Angel investors are accredited investors who look at a start-up from various perspectives. Of these, the following five things are the most important and crucial for your start-up:
- Quality, passion, and commitment of the founders.
- Potential market opportunity and size of total addressable market
- A clear business plan and early customer traction.
- Interesting technology or potentially patentable intellectual property
- Reasonably well thought-out financial projections.
7. What do angel investors care about from a market and traction perspective?
The angel investor will want to get a sense of how big the market is, what it costs to acquire a customer, and how much they are worth over their lifetime. Be prepared to answer questions like:
- How big is the market opportunity?
- What is TAM, SAM and SOM?
- What’s your go-to market strategy?
- How does your product/service differ from theirs?
- How much does it cost to get a customer?
- What is the expected lifetime value of a customer?
- Who is your competition?
- How long is your average sale cycle?
- Do you have any unique marketing strategy?
- What type of feedback have you received from your early traction?
8. What do angel investors look for from a financing perspective?
- How big a capital are you raising in this round?
- Has any other investor soft committed as a part of this round?
- How much runway will this round give you?
- What is your current gross burn and net burn?
- What is your gross margin?
- How much cash have you personally invested in the company?
- Have you raised any capital from friends and family? What are the key terms?
- Do you have detailed financial projections for the next two years?
- What are the key assumptions behind your projections?
- Do you have unit economics?
- At what pre-money valuation is this round of securities being offered?
9. What questions should you be prepared to answer about the management team and founders?
- Who are the co-founders and how much skin do they have in the game?
- Who are the other key team members?
- How many employees does your company have?
- What are your recruitment plans for the next 12-18 months?
- Has any other successful venture had management team members in the past?
- How much time does the founders commit to the startup (Hint: Should always be fulltime)
- Does the team have domain expertise relevant for the business?
- Are there team members for all key functions now and in near future? (eg: Finance, Marketing, Product Development)
9. My idea is unique. Will my angel investors sign an NDA?
Here is the fact that may cow founders, especially when they are about to share their business ideas with prospective investors who refuse to sign a Non-Disclosure Agreement. Such angel investors get hundreds, if not thousands, of deals yearly. Signing NDAs and tracking them is too much of an administrative effort. So, the simple answer to the question is “No”.
Suggested Reading: https://synvestcapital.com/film-production-company-business-plan/
10. How do I know whether this is the right angel investor for my start-up?
Having the wrong investor onboard could kill most start-ups in the long-run. Doing due diligence on the angel investor is quite important, and entrepreneurs must ordinarily ask the following questions:
- How often have you led rounds?
- Can you refer me to other founders with whom you have worked?
- What would you contribute to our start-up other than the financial investment?
- How many follow on investments have you made?
- What is your timeline for the investment?
- What is the first thing that you would want us to do after closing?
- Can you introduce me to a founder of a start-up in your portfolio that failed?
- What are your other investments in our space?
11. What are the typical reasons an angel investor will reject an investment?
Fundraising for your start-up is one of the toughest things that you, being a founder, have to do. Getting used to a “No” is something. Actually, by the time you close an angel investor round, you would get used to getting “No’s” from investors. Here are some of the typical reasons for rejection:
- The market opportunity is too small.
- Single founder. Period.
- It’s way too early to invest. We’ll wait and circle back in six months’ time.
- The founders seem not to be passionate about the start-up.
- Too risky sector with several investments failing.
- The financial projections were way too optimistic and the underlying assumptions unreasonable.
- The company does not have a unique business model. It can be copied easily, and no major entry barrier exists.
- There appears to be no competitive advantage.
- There is no clear marketing plan for the business.
12. What would an entrepreneur need to do before a pitch meeting with an angel investor?
- Prior to a pitch meeting, the entrepreneur will want to make sure to do the following concerning the investor:
- Know about their background. Read their LinkedIn profile.
- See if you have any common connections. Pitches that come through a referral have a far higher chance of success, than a cold pitch.
- Don’t directly pitch to your “ideal investor”. Do demo pitches with friends and family, and other investors to garner feedback before pitching to your ideal investor.
- Be clear on your start-ups metrics, like burn, churn, valuation etc.
Finally, you will need a great pitch deck. Keep it under 15 slides, language simple, crispy, and clear.
