What Criteria Do Angel Investors Look For in a Startup?
How are angel investors different from other venture capitalists? Angels are often high net worth individuals investing on their own, as opposed to a VC firm or syndicate that invests as a group. Angels want to invest in a high potential company before most VC’s get to it in pre-seed or seed rounds. They usually write checks between $25K and $100K.
Like VCs, angel investors also aim to provide mentoring and connections that help startups find suppliers, product-market fit, customers, and sales traction. Angels look for startups that have the potential to scale quickly and serve a very large TAM (total addressable market). They want startups that can disrupt industries (think SaaS companies like Uber and Airbnb), and grow 100x. Unicorns like this are hard to come by.
Angel investors are very selective with the startups they choose. Contacting an angel investor doesn't ensure a meeting. They usually have a format for validating companies before seeing pitches, and may only invest in 1 of 100 companies that pitch to them. Out of ten companies they invest in, they may expect only one to produce the outsized returns that make up for the losses in all the others.
Is An Angel Investment the Right Kind of Capital for My Business?
Before starting your search for angel investors, here are some questions that can help you determine if an angel investment is the right kind of capital for your business:
- Is your product or service capable of scaling 100x?
- Are you looking for your very first round of funding?
- Are you okay with trading equity or convertible debt for capital?
- Are you open to the mentorship and consulting that an angel may provide?
Other Fundraising Options
If you’re on the fence about trading equity in your company for capital, consider the advice Patrick Driscoll of Chasing Rainbows VC gave in a recent Inside interview. Maybe a non-dillutive form of capital would be a better fit for your company. These include:
- government grants
- government voucher programs (access to specialized services or resources that you may not be able to afford on your own)
- nonprofit grants
- bank loans
- royalty financing (capital in exchange for a fixed percentage of future revenue)
Virtual Networks that Connect Founders with Angel Investors:
If you’re ready to move forward with finding angel investors, it can be tough to know where to start in a sea of online resources. Virtual communities like Inside.com, This Week In Startups, and Founder University support entrepreneurs through news, networking, summits, courses, and job boards. Connections can always be made in these ways, but if you’re specifically looking for angel investors, here are some of the top platforms where you can find them:
- Wellfound (formerly AngelList). The OG angel investor platform since 2010. Also a job board where founders can hire their team.
- Gust: Connects startups with investors, accelerators, and incubators.
- Angelsvc: Female-led community of angel investors.
- FundersClub: Raise from accredited investors.
- CircleUp: Credit financing and equity financing for high growth consumer goods startups.
- StartEngine: StartEngine announced in February 2022 that they will acquire the popular equity crowdfunding platform SeedInvest.
- MicroVentures: Private investors and public crowdfunding.
- Republic: Private investors and public crowdfunding.
- Wefunder: Private investors and public crowdfunding.
- Seedrs: Private investors and public crowdfunding.
- Finally, accelerators are a surefire route to access investors of all kinds, angels included. The big hurdle is getting accepted, which can be tough for very early startups, but once you’re there, the connections to investors are priceless.
More Tips on Finding Investors
- This is a relationship business, so establish as many touch points as possible with angels that you’re pursuing.
- Have conversations beyond just asking for investment.
- Ask for money, get advice. Ask for advice, get money.
- Get involved in organizations or events that investors are involved with.
- Adopt TechStars’ philosophy of Give First, and value will eventually come back to you.
- If you’re a first-time founder, you may have more success with smaller investors than bigger investors.
- Fundraising is a numbers game.
- Many VCs will tell you to cast your net wide. Treat fundraising like your a sales rep. Create a workflow for reaching out to a lot of investors. Use an investment pipeline spreadsheet to track your interactions with investors.
- Don’t wait for no’s and move on. Remember that you will mostly hear no’s. You may have to get 99 no’s before one yes.
- Have a solid pitch deck to show investors. Ensure that your deck has been looked over by a trusted third party who can fix errors and make suggestions. Your deck should include the following slides:
- Validation and/or Traction
- Financial projections
- The Ask
A few points to remember in closing:
- Angel investors are looking for a certain type of company to invest in, and if yours isn’t a perfect fit, there are many alternate, non-dilutive ways to get funded.
- Angel investors are selective, so you may have to hear 99 no’s before one yes.
- Be part of the startup and entrepreneurial ecosystem. Give your time and knowledge, and remember to focus on relationships in your fundraising journey.
- Use the many virtual platforms that will connect you with investors, and take advantage of in-person organizations and events as well.
- If you’re fundraising for the first time, talk with founders who have done it before and learn from them.
Connect with angel investors, VCs, and other founders at inside.com/vc.