What Angel Investors Want to Know Before Investing in Your Startup

Angel investors put money in early-stage startup companies in exchange for a stake in the company.  Investors hopefully to duplicate the high-profile successful investments made in companies like Airbnb, Facebook, Instagram, WhatsApp, Uber, and more.  Investors mostly make small bets ($25,000 to $100,000) with the hopes of getting “home run” returns.

Angel investors understand that startups have a high risk of failure. So ultimately and angel investor needs to feel confident that the potential upside/rewards from investing are worth the downside risks.

They put a variety of key issues and undertake due diligence before they invest in a startup.

1. Is there a great founder/management team?

Many investors consider the team behind a startup more important than the idea or the product. They would want to know that the team has the right set of skills, drive, experience, and temperament to grow the business. Anticipate these questions:

• Who are the makers and key team members?
• Have participants of the team worked together before?
• So relevant domain experience does the team have?
• What important additions to the team are needed in the short term?
• Why should the team uniquely capable to execute the company’s business plan?
• How many employees does the company have?
• What motivates the founders?
• How must you plan to scale the team in the next 12 months?

So, the investor will need to make a judgment about whether the founder and team will be enjoyable to work with. Does the investor believe in the team? Is the CEO experienced and willing to listen? Is the CEO trustworthy? Also, witnessing experienced advisors can be very helpful in the early stages to help bridge an early-stage team that is still growing.

2. Is the market opportunity big?

Many put are looking for businesses that can scale and become meaningful, so make sure you address up front why your business has the potential to become really big. Don’t present any small ideas. So the first product or service is small, then perhaps you need to position the company as a “platform” business allowing the creation of multiple products or apps. They will want to know the actual addressable market and what percentage of the market you plan to capture over time.

3. What positively early traction has the company achieved?

So of the most important things for investors will be signs of any early traction or customers. The company that has obtained early traction will be more likely to obtain investor financing and with better terms. Examples of early traction can include the following:

• So creation of a beta or minimally viable product
• Basic or pilot customers, especially brand name customers
• Strategic partnerships
• Customer testimonials
• Partnership into competitive programs such as Y Combinator or other technology accelerators or incubators

They will want to know how the early traction be accelerated? Whatever has been the principal’s reason for the traction? How can the company scale this early traction?

Not forget to show early buzz or press you have received, especially from prominent websites or publications. Do the headlines in a slide on your investor pitch deck. Put the number of articles and publications mentioning the company.

4. Do the founders passionate, determined, and in it for the long haul?

More venture capitalists look for passionate and determined founders. They’re individual’s who will be dedicated to growing the business and facing the inevitable challenges? Start-ups are hard, and investors want to know that the founders have the inner drive to get through the highs and lows of the business. Such want to see genuine commitment to the business.

5. Does the founders understand the financials and key metrics of their business?

They looked for founder’s who truly understand the financials and key metrics of their business. Should needed to showcase that you have a handle on all of those and that you are able to articulate them coherently.

Down are some key metrics that angel investors will care about:

• Important burn rate of the business
• Estimated growth in revenues
• Basic margin
• Full value of a customer
• Customers acquisition cost
• Important components of gross revenues and gross expenses
• Till long it will take to get the company to profitability
• So much additional capital will need to be raised in the future, and when
• Otherwise key performance indicators of the business (KPIs)

6. Do the investor know the entrepreneur? If not, has the entrepreneur been referred by a trusted colleague?

Whether the investor already knows and likes the entrepreneur, that is a big advantage. So the entrepreneur doesn’t know the investor, the best way to capture their attention is to get a warm introduction from a trusted colleague: The entrepreneur, a lawyer, an investments banker’s, other angel investor, or a venture capitalist.  Investors get inundated with unsolicited executive summaries and pitch decks. Much if the times, the solicitations are ignored unless they are referred from a trustworthy source.

7. Do the initial investor pitch deck professional and interesting?

So first thing the investor will expect is to see a 15-20-page investor pitch deck before taking a meeting. Till he pitch-deck, the investor hopes to see an interesting business model with committed entrepreneurs and big opportunity. Such make sure you have prepared and vetted a great pitch deck. So other pitch decks and executive summaries can help you improve your own.

8. What are the potential risks to the business?

They want to understand what risks there might be to the business. They’ve want to understand your thought process and the mitigating precautions you are taking to reduce those risks. Therefore, inevitably are risks in any business plan, however, so be prepared to answer these questions thoughtfully:

• What’s do you see as the principal risks to the business?
• What legally risks do you have? Will the business model comply with applicable laws, including expanding privacy protections?
• Whatever technology risks do you have?
• So you have any regulatory risks?
• See there any product liability risks?
• Whatever steps do you anticipate taking to mitigate such risks?

Start-ups that can show they have reduced or eliminated product, technology, sales, or market risks will have an advantage in fundraising.

9. What is the company’s product great?

Therefore, Entrepreneurship must clearly articulate what the company’s product or service consists of and why it is unique, do entrepreneurs should expect to get the following questions:

• Whether so user’s care about your product or service?
• Whatever are the major product milestones?
• What’s are the key differentiated features of your product or service compared to competitors?
• Whatever have you learned from early versions of the product or service?
• What’s are the two or three key features you plan to add?
• However often do you envision enhancing or updating the product or service?
• Done you have any favorable customer reviews?

10. However will my investment capital be used and what progress will be made with that capital?

Investor’s will absolutely want to know how their capital will be invested and your proposed burn rate (so that they can understand when you may need the next round of financing). It’s willing too allowed the investors to test whether your fundraising plans are reasonable given the capital requirements you will have. So it will allow the investors to see whether your estimate of costs (e.g., for engineering talent, for marketing costs, or office space) is reasonableness given their experiences with other companies. Investors want to make sure at minimums that you have capital to meet your next milestone so you can raise more financing.

Doesn’t the company have differentiated technology?

As much angel investors invest in softwares, internet, mobile, or other technology companies, an analysis of the start-up’s technology or proposed technology is critical. The questions the investors will pursue include:

• However differentiated is the company’s technology?
• Whatever competitively advantaged will there be over existing technology?
• However easy willing it be to replicate the technology?
• However expensive will it be to build the technology into each product?

Akin to that, the angel investors will do due diligence on the key intellectual property owned or being developed by the company, such as copyright, patents, trademarks, domain names, etc. Is the intellectually property properly owned by the company, and have all employees and consultants assigned the intellectual property over to the company?

12. See there company’s financial projections believable and interesting?

If you’re start-ups presented investors with projections showing the company will achieve $1 million in revenue in five years, the investors will have little interest. Investors want to invest in a company that can grow significantly and become an exciting business. So, if you show projections in which the company predicts to be at $500 million in three years, the investors will just think you are unrealistic, especially if you are at zero in revenues today.

Avoid  presumably in your projections that will be difficult to justify, such as how you will get to a 400% growth in revenue with only a 20% growth in operating and marketing costs.

So ordering to believer yourself financial projections, Investors willing wanted you to articulate the key assumptions you have and convince them those assumptions are reasonable. your can do that’s, then the investors won’t feel that you have a real handle on the business. Expecting that investors will push back on the assumptions and they will want you to have a reasonable, thoughtful response.

13. However will the company market its products or services?

Investor’s knowledge that buildings a great product or service is not enough. The companies just haven’t the beginnings of a well thought out marketing plan. The marketing questions will include:

• Who is your target market?
• Whatever are the best ways to approach the target market?
• What’s do you anticipate the customer acquisition costs to be?
• However will you employ social media to attract customers?
• However will you use paid search through Google, Bing, Facebook?
• What PR do you intend to employ?
• However will much you make sure that your website is search engine optimized?
• Will you be engaging in content marketing?
• Willing you be relying on third-party distribution channels? Are those third parties sufficiently excited and incentivized?

14. Whatever are the specific terms and valuation of the financing round?

Investors maybe ask them followings questions about the financing round:

• However, much is being raised?
• However, much is already committed by investors?
• See any prior investors participating in the round?
• Is therefore a well-known investor leading the round?
• Is thereby a minimum amount of capital being raised before a closing occurs?

Validation will be an important issue for the investors. If you’re tell an investor you want a $100 million valuation even though you started the business three weeks ago, or don’t have much traction yet, the conversational will likely end very quickly. Often, it’s best not to discuss validation in a first call/meeting other than to say you expect to be reasonable on valuation. Busy the investors too does want to waste a lot of time on a deal if the valuations expectations are unreasonable or not attractive.

Validation at an early stage of a company is more of an art than a science. To help bridges the valuation gap for early-stage startups, you often see investors looking for a convertible instrument with customary conversion discounts and valuation caps. These instruments, such as convertibles notes and “SAFEs,” have become quite common.

Final Tips for Entrepreneurship Seeking Angel Investors

Here’s see somewhat concluding tips for entrepreneurs seeking to obtain angel financing for their startup:

• Targeting angel investors whom investment in your location (San Francisco, New York, L.A., etc.). Some investor’s will only invest in companies located near them.
• Targeting angel inveystors who invest in your space (software, internet, mobile, biotech, cleantech, etc.).
• Haven’t a greater 15-20-page investor’s pitch deck.
• Practice your pitch and get feedbacks. Be preparedness to have pitch meetings through Zoom or other video platforms.
• Do a productive demonstration or have a well-produced video prepared.
• Make surely you have researched the competition and anticipate the questions you may get about competitors.
• Show the investors that there is an opportunity for a big exit (M&A or IPO) in three to seventh years.