What Does an Angel Investor Look For?

Dear Superpreneur,

This week, I gave a webinar about angel investment and what investors are looking for.  I am pleased to give a written version of it here in this post.

I will explain what I’m looking for when considering investments and while these are my personal views, I do think that most investors, and particularly business angels, have similar expectations.

The first thing I’m looking for, and that any investor should look for, is what your mission is!  What get you off the bed every morning, what passion do you have.

In that respect, I like the framework of the Singularity University, called MTP – Massive Transformative Purpose!

Is your mission as an entrepreneur enough bold, big and able to inspire others?  Will you be able to attract people around your idea?  Investors but also collaborators, partners and clients of course.

Can you make a real breakthrough?  Disruption is a word which is often misused … but can you transform the market where you want to be active.  As Peter Thiel says in his wonderful book Zero to One, do you have identified a secret sauce that can cause that transformation?

And finally, what’s your purpose?  Why are you doing this?  Is it just to have a job, to become rich or to solve a big problem that can impact a billion lives.

Think about these questions and be prepared to explain your MTP to investors.

Once you have identified your MTP, focus on a specific moonshot.  The specific idea, project that will allow you to sky rocket and go to the moon!

A moonshot, so your project, has 3 characteristics:

1. It solves a huge, or at least, a big problem  … Remember that an entrepreneur is someone that identifies a problem and comes with a solution!

2.To solve this problem, you use a breakthrough technology or solution, something that’s really innovative … To be complete and intellectually honest, you are not obliged to innovate by the technology, some companies innovate with a new business model for example.  However, generally, the most exciting companies have an innovative technology combined with an innovative business model.

3.You come with a radical solution which really disrupt how it was done before, or which brings a solution to a problem that was not solved so far.

How you can make it is paramount for an investor.  It’s all about a value proposition. You will need to show how you create value, how you capture value and finally how you deliver it.

This is why the 3 most important things that I’m checking as an investor are:

-Your idea, technology linked to the value creation

-The market, linked to the value capture

-And the organization/team that allows you to deliver the value

Typical questions that you may be asked will be:

-If you want to create value, the investor will look at the potential traction for such product or service.  Also how much revenues you can generate.  Are there clients ready to pay for such product or service?  You can have the best technology, but if nobody wants to buy it, forget about it!

-With respect to the market, is there an attractive market size?  What is the competitive landscape? What are your competitive advantages?

-In terms of value delivery, do you have the right team to execute your plan?  How many full-time people?  Is their background relevant?  Can the investor trust you as a founder?

Now that we have seen the 3 most important things an investor will look for, let’s dive in into more detailed expectations.

You must understand that investors may have quite simple or straight expectations while your reality is and will be much more complex.  So when you deal with investors, before they invest, but mainly after they have invested, try to speak their language, you must understand their expectations and answer their questions as much precise as you can.  Always try to be accurate, honest and never never lie!!

You may face, and probably you will face situations where an investor asks you something you know you cannot achieve.  But listen to what the investor says, maybe it’s a good suggestion, maybe not.  Perhaps he/she is a bit provocative to push you, so that you over achieve.  Think about it.  You are partners, it’s not a war.  He wants you to succeeed.

Be prepared to receive a lot of questions about many aspects of your business.

– Did you make a well-thought research about your business idea and plan?

– What is your organization

– What is the market potential?

– What your plans for financing?

– Do you have a clear exit strategy?

-Have you put your heart into the project?  Or is it a side business?

-Do you have and will you keep skin in the game?

Also an investor will consider very carefully your leadership qualities as a founder.  Are you able to lead and inspire others?  Or are you just an executive that wait for others to make the job?

Are you honest?

Are you able to delegate on teammates?

Are you a great communicator?  Able to sell your idea to investors but also partners and clients?

Do you have a great amount of confidence?  In turbulent times, will you be able to resist to stress and panic, and keep moving.

Are you fully committed to what you are building?

Do you always have a positive attitude?  Being optimistic is probably one of the first qualities of any entrepreneur.

Are you creative able to come with new ideas if necessary?  Sometimes, you will need to pivot to continue your business.  You need to be enough flexible and creative to adapt the our fast changing world.

Of course, as a leader, you need to have some level of charisma … Most people thing that one has charisma or not, but actually you can develop your charisma. I strongly encourage you to read the Charisma Myth by Olivia Fox Cabana where she gives a lot of tips and exercises to improve your charisma. So please read this book … you will enjoy it.

So be prepare to have several meetings with investors.  During these meetings, be prepare to answer a lot of questions.

So, PREPARE, PREPARE, PREPARE !!!!!

You must know your technology, your business model, your market and this is very important, KNOW YOUR FIGURES!!!

The best tip I can give you is to make your business plan and financial plan yourself, I mean with your co-founders, but don’t rely on an external freelancer, advisor … They can of course help you, but you should do it yourself.  This is the best way to master your project and your figures.

Now that I explained what you should focus on as an entrepreneur, what an investor shall look for, and what he/she will expect from you, I would like to give you some specifics about angel investors.

First of all, keep in mind that a business angel

Invests his/her own money

– Has relative limited capacity vs funds/VC’s.  For example, most business angels invest tickets between 10,000 and 50,000€.  A VC may invest between 250,000€ and several millions.

Also, remember that a business angel generellay wants to exit as quick as possible.  Why?  First of all, since he/she has limited financial capacity and since he/she is investing at very early stage, the business angel cannot generally follow up in the successive rounds and can then be dilluted quickly.  Also, his/her interest is to help entrepreneurs at early stage, so better to have his/her money back to invest in other companies, or to start a new company, is for example the business angel is also an entrepreneur.

One more thing.

Can you offer a reasonable return in a reasonable short timeframe.

  • 2X after 2 years is 41% IRR but 2X after 5 years = 15%
  • 5X after 4 years means 50% IRR
  • AND 10X after 1 year is 900% IRR !!!

One important point is also the valuation of the company.  You must have a number in mind, even if it will be negotiable.  Come with something reasonable.  There are different ways to value your venture: the Discounted Cash Flow method or the VC method, or anything you feel appropriate, but have in mind a figure.  Because business angels want to know how much shares they can get with the money they put in your company.

Last but not least, know if you want to offer equity or convertible loans.  Some investors will prefer one or the other.

To terminate, let me give you one final advice:  be brave, don’t give up.  Fundraising is hard, true, but with persistence you can make it!

Look at Bill Gates who said having showed his plan to 1,200 people, out of which 900 said ‘no’, 300 signed up … out of which only 85 did anything at all. Out of those 85 only 35 were serious, and out of those 35, 11 made him a multi-millionaire.

So, be brave and I wish you the best of luck!

Build the world you love!

Fab

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