Angel investors are typically wealthy individuals who seek to invest capital in and offer guidance to startups. Often angel investors are former entrepreneurs or successful businesspeople themselves, and are looking for a potentially significant return on their investment.
Angels are picky about choosing the startups they will invest in, and for good reason. Successful startups can produce exponential returns for early stage investors. Unsuccessful startups, on the other hand, can lose the angel investor’s money and time.
The angel investors our firm has worked with looked at a variety of factors in determining whether or not to invest in a startup. Here are five that were particularly important to them that stuck with me.
1) The People Behind the Idea: A great idea is only as good as the people implementing it. An angel investor is going to look very closely at the team that is running the startup, which is usually the leadership team and the key employees. Angel investors often are directly involved in the startups in which they invest, providing expertise or even taking a position on the team itself. In addition to investing their money, they will invest their time and want to spend that time with exceptional people who are good stewards of the angel’s resources and can execute on the company’s plan.
2) A Goal Has Been Set: In other words, the startup has articulated a plan that has been carefully vetted and challenged. Angels differ on the degree to which they require or rely on a traditional written business plan. In my experience, the more detailed the plan is, the easier it is for potential investors to understand. Being able to visualize the core concepts of a business and how the team plans to execute them is essential to attracting investors. A good business plan can also show an angel investor that the team understands the challenges of its market and how to overcome them.
3) Exit Plan: Exits come in lots of different forms and sizes. Angel investors hold equity (or the right to purchase equity) in the companies in which they invest. Typically angels get their investment back when the startup is sold. Experienced angel investors will look at whether a startup is (and often guide a startup in) positioning itself to attract the interest of potential acquirers.
4) Funding levels: Angel investments also come in lot of different forms and sizes, Most of the angel investments with which I have been involved have been between $50,000 and $1 million. If the total amount of investment required to bring the company to sustainability and achieve a profit is more than this, angels sometimes team up or create a fund to provide the needed capital.
5) Location, location, location. Angel investors are usually more willing to help local startups for several reasons. In addition to wanting to contribute to the success of their local business community, it is easier from a practical standpoint to observe and interact with a company if it is local. Proximity affords an angel the opportunity to take an active role in the startup.
It is rare for new companies to successfully attract early stage outside investment. When they do, the benefits of experienced leadership and financial resources can have a miraculous effect. (That might be why they’re called angels!) If your company has interest from an outside investor, or if you are an angel seeking to properly structure investment in an early stage company, contact The Law Office of Chris Clark. We can answer your questions and assist you at every stage of a business’s life cycle.