At a basic level, angel investors are people with spare cash who want to invest some of it in growing businesses. For entrepreneurs, they represent a great opportunity to get your hands on equity funding, while teaming up with a trusted advisor.
Angel investors typically offer a more personal partnership than, say, a venture capital company, crowdfunder or a bank. Plus, there is usually less red tape to wade through than other, more formal, financing routes.
This article answers the question: what do angel investors look for when investing in entrepreneurs?
The fundamentals of angel investing
Many business angels are successful business people themselves, who want to create the dual benefit of helping up-and-coming entrepreneurs while making their money grow.
They might work alone or be part of a network. They might have the resources to invest millions of pounds – like the UK’s most famous angel investor, Alan Sugar – or perhaps ‘only’ a few thousand.
Either way, they are looking for ambitious entrepreneurs who represent a safe bet. The prospect of making a fortune is always balanced by the (strong) possibility that they will lose their money, so they will always choose investments carefully.
The good news is there are a lot of business angels out there. Statistics on the market are hard to come by, mainly because many investors work privately, but analysis of government tax incentives related to angel investing indicates that in 2014 alone £1.5 billion was invested in UK companies.
The ecosystem has grown since and, even at time of writing during the coronavirus pandemic, they remain active. Activate our Angels, an UK initiative to create more data on the market, says two-thirds of angels are still putting their money to work.
It estimates that, in a good year, the total angel investment pot is more than £2 billion.
What do angel investors look for?
One question is permanently lodged in the minds of angel investors: will I see my money again? From this single query springs dozens of smaller considerations about the who, what, where, when and why of each opportunity.
Only by answering all their questions in a positive and convincing manner will business owners persuade investors to open their wallets.
Perhaps surprisingly, the first factor most angel investors assess is the business’ leadership. They want to know who is driving the enterprise forward and will inspect evidence that they are competent and trustworthy.
Be prepared to answer questions such as: what skills to team members offer? Does your business have people with relevant experience and a track record of success in the market? Are they honest and do they appreciate the downsides of their proposition?
On a more prosaic level, they also want to know that you are approachable, communicative, and easy to work with. Your character is therefore an essential piece of the puzzle.
At its heart, investment is a numbers game. Your business must provide evidence that metrics such as revenue, profits, audience, or reach (or all of these) are heading in the right direction.
Business angels rarely invest in businesses pre-launch because past performance is such a useful indicator of future success. Those who are prepared to back embryonic enterprises generally ask for a bigger equity slice to balance the risk. So, it’s in your interest to develop a positive track record reflected in some nice upward graphs.
If your business is pre-revenue then you must provide proof of demand via subscribers, clicks or some other audience metric. Today, data is the world’s most valuable commodity, so a rich database could entice investors even if it is yet to be monetised.
The product or service
It might seem odd, but the actual product or service is not always a high priority for business angels seeking investment opportunities. It’s true that many focus on specific sectors – usually ones of which they have experience – but beyond that they are more interested in success metrics than what your widget actually does.
That said, it’s usually important for investors to understand the product or service and how it benefits customers, so be prepared to justify its existence. A honed elevator pitch is a must: you wouldn’t buy a book with a vague synopsis on the cover, the same applies to buying businesses.
The market is another essential consideration for any serious investor. It is composed of three main elements: potential customers, business rivals and the environment in which they operate.
Markets are living organisms which ebb and flow. They can expand rapidly and implode just as fast. Take the example of fidget spinners, the children’s toy, which were a phenomenon in 2017 but sales plummeted. Today, they no longer occupy a place in the top 100 toys by sales.
The coronavirus pandemic sent many markets into a tailspin, most notably aviation, hospitality, and commercial office space; but communications software, food and online retail experienced a boom.
Angel investors are always looking for markets on the up, but they also crave stability and consistency. So, it’s important to demonstrate that the landscape you operate in has a bright future regardless of what the world throws at it.
Numbers ultimately win minds, but even the hardest business angels are interested in the human side of their business portfolios. In short, a good story goes a long way.
Investors are interested in your business’ back story and any interesting anecdotes or quirks that explain why it exists. It might be a remarkable coincidence, or a hobby that developed into something more. You might have met your business partner in unusual circumstances or perhaps the product evolved from something completely different to what you were originally working on.
These details matter because they help build a clear picture of your business beyond just the raw product details and financial information. A good story adds colour and keeps people engaged.
Your exit strategy must be clear, detailed and realistic. Anyone who watches Dragons’ Den will know that you must justify a guarantee that you’ll quadruple revenue and secure a buyer in three years. Back claims with evidence or risk being overlooked.
It’s good to be ambitious, but remember that most business angels have long CVs and are experts at identifying wishful thinking. As a rule of thumb, it’s better to give modest projections and then explain how the business can go further, than to exaggerate and be called out for over-egging the pudding.
Not every investment is won after a tense presentation – some evolve over time or happen as part of an existing partnership, but in many cases winning or losing support hinges on a snappy pitch.
Here are a few essential rules of pitching:
- Dress appropriately.
- Keep your presentation short and invite questions
- Create slides or bring materials that enhance what you’re saying without distracting from it.
- Include co-founders and key members of the leadership team.
- Be polite and try to display confidence without tipping over into arrogance.
- Practice, practice, practice until your pitch is perfect.
Securing business angel funding is a two-way street. If your business is valuable, then ensure you get a good deal from someone you can work with. Take your time to research the angel economy; investigate associations and investor groups.
Consider a potential investor’s track record and speak to business owners they have backed in the past. Are they reputable, do they offer more than money, and will you still be friends in a year’s time?
Lastly, when you agree a deal, it’s vitally important to go through the proper legal channels. Employ a corporate solicitor, check the small print and only sign on the dotted line when you are completely comfortable with the terms and conditions of the agreement.
In an ideal scenario, business owners and their investors should be a team that works together towards mutual objectives. But sometimes relationships break down, so you should be prepared for the worst-case scenario, even as you aim for your perfect exit.