As a startup, your first money will likely come from angel investors. But, unlike professional investors (VCs, funds, strategic partners), angel investors don’t have the same due diligence capabilities to vet startups. That’s why many angel investors invest in packs; because, as they say, there’s strength in numbers. If one person misses an important detail, a partner investor may catch it. It’s equivalent to having several people proofread an article.
Makes sense, right? But there’s more to it than that. Be aware of these eight points, and you’re halfway to your angel funding.
It’s About the Team
Angels look for stellar entrepreneurs, period. If you and your team are impressive, you have checked the most important box in the investor’s check-list. Since you will have a long relationship with your angels, it’s a lot more enjoyable if you like each other.
Also, passion for your startup is not a “nice to have,” it is required!
Your technology needs to be great. The assumption is that a stellar team can be successful even with a so-so idea (not that I’d recommend showing up with a less-than-fantastic concept). Bonus: if you have patents or other unique IP, that’s even better.
The market you play in should be one with a bright future, and it should be logical that it will continue to grow. Investors know that in a huge expanding market you can still succeed, even if not everything works out. And, spoiler alert, not everything will work out.
Angels need to see potential for a 30-times-plus return. Yes, they know they won’t get that with each investment, but when they invest, they have to be firmly convinced that it is possible. Otherwise, they wouldn’t invest.
Your Skin in the Game
Angels like to see you invested your own money, or at least asked some family. I personally don’t recommend cashing out your 401K, but I do like to see commitment. I like to see a personal investment of meaningful size. As an entrepreneur, you need to risk your own money first before you ask strangers for money.
These days, angel investors can invest millions and syndicate deals to invest tens of millions. Many markets have typical bite sizes. In healthcare technology in Dallas, for instance, many minimum investments often start at $25,000, typical seed rounds are $500,000 to $1 million. That means you will likely have more than a dozen investors. Also, in our market, angels often like to invest in a company for that amount with a pre-money valuation of $4 million or less. This allows them to buy 20 percent of your company or more.
There are important group dynamics in play. Just as you have to hear a product name a certain number of times before you really remember it, so it is with startups. In a community of angel investors, it is important to come up as a topic of conversation often (obviously in a good context). Whether it is showing product progress, fundraising traction, or exciting news that can be exchanged at the cocktail party or business meeting, you want to stay front-of-mind. Angels will be willing to do a significant amount of business development for you, if you do things right.
There is real value in group opinions. When a bunch of business-minded angel investors are evaluating a business deal along the simple metric of “would you invest in this?” then you can get a surprisingly high level of accuracy in predicting the next fundraising success.
I have done angel investing for several years with a well-curated panel of investors and experts. For a healthcare investment conference I ran, my panels picked an outstandingly successful bunch of startups out of a large group of applicants. When I followed up on the startups’ fundraising success, it turned out that between 70-80 percent got their funding in the 12 months following the conference.
At Health Wildcatters, we do things differently, but the overall principle is pretty similar. While we use additional tools to evaluate the viability of the businesses, the core of our success is built upon a large number of inputs by a well-curated and successful group of business people—our investors and mentors.
If you are an entrepreneur, it is of paramount importance to be aware of the factors playing into an investment decision from an investor’s point of view. Startups at Health Wildcatters learn this lesson early, and this, paired with the fact that they have made it through a rigorous selection process and three-month program (more competitive than most Ivy League schools) allows our batch to attract on average of $5 million in the six months following the end of the program.
Whether you join an accelerator or go it alone, embrace the process; and if you can convince a few people that your startup is worthy, chances are that others in the angel community that will come to the same decision.
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