12 Things You Must Know About Angel Investors Before Raising Capital
Angel investors are usually one of the first investors in any start-up. The growth of angel investors in the start-up world has been phenomenal. Several high-profile success stories like Facebook, WhatsApp and Uber have spurred other angel investors to take the plunge into angel investing. An angel investor is usually an individual who has spare cash available and is looking to put that extra cash to work in a high-risk environment in exchange for a higher rate of return.
Angel investor groups like the Keiretsu Forum have been leading the charge in the angel investment world. According to PitchBook, Keirestu is the leader in the angel investment ecosystem, for four consecutive years.
In this article, we look at the top 12 things entrepreneurs must know before raising money from angel investors.
1. How much do angel investors invest?
Most angel investors typically invest anywhere between $25,000 to $250,000. Some investments could go higher than this range, in certain cases.
2. What do you need to keep handy before approaching an angel investor?
Typically, an entrepreneur would need to keep the following things handy before approaching 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?
You can find several sources for angel investors online. Some of the more famous sources are:
- 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 time it takes to close a round usually varies depending on the angel investor, the nature of the investment, and extent of due diligence and paperwork involved. Raising capital is usually a time consuming process, especially at the early stage when the founders have other things to do like hiring, marketing and product building. Based on our experience, we usually find that the typical round takes about 3-6 months to close (i.e. from your first pitch to an investor to the money coming into the bank).
6. What are the five most important things for angel investors?
Angel investors look at a start-up from several angles. Here are the five most important things that are critical for your start-up:
- Quality, passion and commitment of the founders.
- Potential market opportunity and the 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, the cost of acquiring a customer, and their life-time value. So you should be prepared to answer the following questions:
- How big is the market opportunity?
- What is the total addressable market (TAM), serviceable addressable market (SAM) and share of market (SOM)?
- What is your go-to-market strategy?
- How is your product/service different from theirs?
- What is the cost of a customer acquisition?
- What is the projected lifetime value of a customer?
- Who are the company’s competitors?
- What is the typical sales cycle?
- Do you have a clear marketing strategy?
- What feedback have you gained from your early traction?
8. What do angel investors look for from a financing perspective?
- How much capital are you raising in this round?
- Do you have soft commitments from any other investors 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 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 underlying your projections?
- Do you have unit economics?
- At what valuation are you offering securities in this round?
9. What questions should you expect about the management team and founders?
- Who are the co-founders and how much skin do they have in the game?
- Who are the key team members?
- How many employees does your company have?
- What are your recruitment plans for the next 12-18 months?
- Have the management team members been a part of any other successful venture previously?
- How much time do the founders dedicate to the startup (Hint: Should always be full-time)
- Does the team have the relevant domain expertise?
- Do all key functions have team members in place (now and in the near future)? (eg: Finance, Marketing, Product Development)
9. My idea is unique. Will my angel investors sign an NDA?
When sharing their business ideas, founders are often intimidated by the fact that the prospective investors are unwilling to sign a Non-Disclosure Agreement (NDA). The fact is that angel investors gets hundreds, if not, thousands of deals every year. Signing NDAs and keeping track of them is too much of an administrative effort. So in simple terms, the answer to the question is “No”.
10. How do I evaluate if the angel investor is right for my start-up?
Having the wrong investor onboard could be deadly for most start-ups in the long-term.Doing due diligence on the angel investor is very important, and entrepreneurs should typically ask the following questions:
- How often do you lead rounds?
- Can you refer me to other founders you have worked with?
- 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 why angel investors will reject an investment?
Raising capital for your start-up is one of the toughest things that you have to do as a founder. Hearing a “No” is something that you have to get used to. In fact, 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 is too early for us to invest. We will wait and circle back in six months’ time.
- The founders don’t seem be passionate about the start-up.
- The sector is too risky with several investments failing.
- The financial projections were too optimistic and the underlying assumptions were unreasonable.
- The company does not have a unique business model. It can be easily copied, and there are no major barriers to entry.
- There is no clear competitive advantage.
- The company does not have a clear marketing strategy.
12. What should an entrepreneur do to prepare for a pitch meeting with an angel investor?
Here are some key things an entrepreneur should do in preparation for a pitch meeting:
- Understand the investor’s background. Review 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.
- And finally have a great pitch deck. Keep it under 15 slides. Keep it simple, crispy and clear.