Angel investors invest in early-stage or startup companies in exchange for an equity ownership interest. While it is true that angel Investors expect a substantial ROI, it is not the only thing that they are looking for when making investment decisions.
Early-stage investing is an inherently risky way to invest.
Here’s a look at some of these factors that can make or break the investment decision:
Reason to Invest
If you look at the investment portfolio of 10 percent of the most prominent angel investors, you will see that they fall into three broad categories - the economic, the hedonistic, and the altruistic. Different investors invest for various reasons.
One might invest because they (hedonistic investor) believe that the idea will be disruptive in the market, or they (altruistic) might invest in a company that can help make a difference to their community, or they (economic) can invest purely for the promising returns. But regardless of the type, they invest for a particular reason, and as long as that is being satisfied, angels will continue to invest. So before choosing an investor, it is vital to analyse and understand their investment habits.
Credible Management Team
It is to be remembered that an angel investor is investing in the person more than the idea. Conviction speaks volumes during the initial pitch, and the effect is carried over during various funding stages. Given the significant risk, angel investors invest in founders with strong leadership skills, sharp business acumen, and the ability to adapt. Apart from the idea and the founders, they are investing in the vision of the leadership team. If there is any doubt on their ability to execute the vision, the decision may not be positive.
Reasonable Business Plan
No angel investor starts out shopping for revolutionary ideas. They expect a reasonable one. An idea does not always have to the magnitude of breaking the stratosphere in terms of profitability or impact, but it does need to have a solid margin for success. The business plan also needs to be complete and with reasonable investment options. It needs to be comprehensive when it comes to market analysis, scalability, and financial projections. In short, the plan needs to be solid, and it needs to have all its bases covered, with reasonable risk margins.
Clarity When It Comes to Investment Options
Angel investors prefer flexibility when it comes to investment options. They can either wish to provide the funding with loans that have warrants attached or go for a stake in the company more often. So, the investment option needs to be structured in such a way that it is equipped for handling equity investments. This also means that the business owners need to be comfortable sharing a certain degree of control with the investor. The best solution is to approach the investor with an ironclad formal shareholder agreement that details the contingencies of their investment.
Involvement Opportunities
Angels are investors that come when the business is just getting off the ground. So, apart from the capital they provide, they generally expect to be involved in the growth strategy. They might prefer to be a consulting mentor or even take up a more active role by being one of the board’s directors. In some cases, they would even expect to be a part of the deciding management body. This allows them more control and enables them to take a more active part in building a business that they have invested in.
A Mutually Beneficial Exit Strategy
An exit strategy needs to be detailed, and investors expect it to be presented during the pitch. They also prefer to have multiple viable strategies that can be incorporated in a short time period. Regardless of the success or failure of the venture, an exit strategy provides the investor with security. They need to be provided with a detailed understanding of when they can expect returns and, more importantly, how they can mitigate their losses. If a business succeeds to a point where it can go public, then the equity invested by them must be provided accordingly.
No angel wishes to invest in a company that cannot guarantee returns. A sentiment that was best captured by Allan Riding, Professor at Carleton University, who said, "For every dollar that an angel puts into a company, he or she would like to take seven dollars out, after taxes, in seven years." On the whole, along with a solid return, if business owners can incorporate the factors listed above, they will be delivering precisely what angel investors want.
The author, Nandini Mansinghka, is Co-Founder and CEO at Mumbai Angels Network. The views expressed are personal
(Edited by : Anshul)
