What Angel Investors Look for in a Business
Angel investors are high-net worth individuals who provide private early-stage capital for businesses, whose investments represent one of the most sought after forms of entrepreneurial financing. It's estimated that there were approximately 300,000 active angel investors in the U.S. in 2018, and that angle financing was critical to the initiation and survival of startups. The total investment of this group during 2018 was estimated at $23.1 billion (an increase of 7.4% over the previous year) with nearly 70,000 entrepreneurial ventures receiving funding.
What Are Angel Investors Looking For?
A Solid Return: Angel investors are looking for a higher return on their money than they would receive on the stock market, but this desire coincides with a high degree of risk. Only 40% of angel investment exits in 2017 provided investors with more money than they contributed.
“For every dollar that an angel puts into a company, he or she would like to take seven dollars out, after taxes, in seven years," Allan Riding says, a leading expert on angel investing and professor at Carleton University.
A Good Reason to Invest: The three general categories for angel investors include the economic, the hedonistic, and the altruistic, each with their own reasons for investing. While a hedonistic angel investor is most attracted by the excitement of creating something new, disruptive, or fun, an altruistic angel may be most concerned about helping his or her community. Economic or entrepreneurial angels tend to invest in a greater number of companies, take more active roles in the companies in which they invest, and earn better returns as a result. Across the spectrum, angel investors seek out the thrill and challenge of developing new businesses, and successfully courting their interest will require knowledge of their investment history.
A Solid Management Team: Leadership ability is a must when trying to secure investment of any kind. Angel investors are really backing the people that make a business possible, and they demand evidence that a business is in the hands of observant, competent, and trustworthy leaders. For most businesses, a well-rounded management team will include leaders with experience in human resources, manufacturing, accounting, sales, and research.
A Solid Business Plan: Angel investors want to see a business plan that’s both convincing and complete, including financial projections, detailed marketing plans, and specifics about a target market. They want to see a developed vision that includes details of how to grow the business and remain competitive.
A Business Structured for Investment: While some angel investors give direct loans to a business, more than half are looking for a minority equity ownership position. This means a business has to be structured to allow for equity investment and owners must be prepared to give up a certain amount of control in exchange for money. Most angel investors will expect a formal shareholder agreement which lays out the contingencies of their investment.
The Opportunity to Be Actively Involved: Many angel investors expect to actively contribute their time to any venture in which they invest. This could be through acting as a mentor to the company's leadership, serving on the board of directors, or taking an active role as a manager for the company. This additional commitment is a way to help ensure a return on their investment, and a reminder that these angel investors are seeking new knowledge, experience, and professional connections through the businesses they support.
A Viable Exit Strategy: Before any money changes hands, angel investors expect to be presented with a variety of exit strategies for their investment, as well as a comprehensive risk analysis for each. Even the most patient financiers, who actively seek and manage long-term investments, must understand how they’re going to reap a return, and will expect the chronological details of their payout.
The sale of shares to a company’s principals is a common exit strategy for angel investors who hold equity ownership positions, whereas the sale or merger of a company is a common exit strategy for debt-holding investors. Slightly more than half of the angel exits in 2018 were by merger or sale.
Give Investors What They Want
Even when a team, technology, or idea is well-prepared for the market, finding an angel investor that fits the company's vision can still be difficult.
In general, angel investors are searching for teams that blend professionalism with a deep personal commitment to the product itself. No two investments are exactly the same and angles will demand a business plan, time to do their own research, and a worthwhile stake in the businesses in which they risk their money.