Often times, entrepreneurs are rejected for needed capital because their venture
does not match the investorâs criteria, standards, or investment preferences.
Some important fundamentals to consider when selecting an investor is the type of
industry involved, the companyâs stage of development, the amount of capital
that needs to be raised, and the geographic location of the enterprise. Business
owners can save ample time and frustration from investor rejection simply by conducting
a substantial amount of research on potential investors and making sure that their
company complements their investorsâ requirements.
Geography
Most angels prefer to invest locally for a variety of reasons. First, the convenience
of proximity will allow them to frequently visit the companies they have invested
in, so they can regularly convene with the management team and be present to witness
their investment progress. Second, being closer to their investment enables them
to âsourceâ deals through referrals whom they know and trust. In order
to accomplish this, they rely greatly on other locally situated angels, accountants,
attorneys, business associates, etc.
Size of the investment
Angels are interested in building small start-up companies into moderately-sized
businesses or large valuable corporations with a high ROI. These types of start-ups
may require capital of tens of thousands of dollars minimum to launch, with subsequent
rounds of investments throughout the companyâs development. Angels tend to
invest anywhere from $25,000 to $500,000 or more.
For example, a $500,000 total investment a start-up requires could be made by one
angel investor, 5 angel investors who contribute $100,000 each, or 20 angel investors
who contribute $25,000 each to the business endeavor.
Management team
The management team appointed by the companyâs founders must be solid, balanced,
and experienced. Some businesses have management teams located in different cities
and come together solely through telecommunications or videoconferencing. This kind
of âscheduledâ organization puts the whole team at a disadvantage because
they are not physically working together or know how to properly collaborate in
the business.
On the other hand, if all the individuals of a management team are situated in one
location, the individuals have the opportunity to work with each other and learn
from each othersâ strengths and weaknesses. Even if a team has never worked
with each other in the past, when they come together during the start of a company,
they should demonstrate the âability to execute,â that is, work together
in harmony with a proven track record and show their company is establishing revenue
and a quick ROI.
Market/industry influence
Angel investors usually invest in industries they have experience in. In addition,
they always evaluate the marketâs needs for different products or services.
The industry of the young companyâs goods and inventions should already demonstrate
vast growth potential before an angel investor will consider providing the necessary
funds. A growing market is the key to profitability and is indicative of an angel
investorâs strategy. Early-stage companies should always provide goods and
services that reflect uniqueness, a competitive edge, and consumer needs in a growing
market.
Improving technology
Technology products and services have always demonstrated popularity among consumers.
Since many technologies exist, the entrepreneur should convince the angel investor
that their particular technologies are not only one-of-a-kind, but that they address
any flaws that their competitorâs products may have and as a result consumers
will purchase their products and services.
Many technical people employed by large corporations are able to witness numerous
market niches their companies have ignored. These people then move on, leaving the
company, and develop a technology that addresses the previous problems encountered.
Angels like to invest in companies like this because there is already a proven consumer
base and an identifiable customer need that gave rise to the entrepreneurâs
novel approach.
Competitive advantage
Every investor determines a companyâs worth by trying to identify the reasons
behind why customers are inclined to use their products or services. However, a
strong customer service establishment is fundamental to any companyâs success.
This competitive edge is proven by the fact that customers will still eagerly purchase
products and services from a company even though a competitor offers the same goods
at a lower price. Young business owners should convey the extraordinary, distinctive
qualities of their company to their investors and why their enterprise possesses
a competitive edge.
Potential rate of return
When compared to venture capitalists, monetary gain tends to be
a secondary motive for most angel investors. While many angels invest for reasons
that are not purely financial, their overall goal is still profitability. They recognize
that start-up companies are high-risk investments and will want to justify that
risk by seeking commensurate (very high) rate of returns.
For example, some angels require a 25% rate of return each year, while others may
desire much more, such as ten times their investment in a specific time frame. This
given period of time may span from a couple of years to several years. Many of these
angel investors do not expect a rate of return for at least 5-7 years. Their average
return on investments expected is about 34%.
Exit strategies
This is a companyâs approach for providing investors with a liquidity event,
an occasion or time during the companyâs development at which the investor
can obtain their rate of return. The exit strategy is often included in the entrepreneurâs
presentation, which should provide the best estimate of time for exit and liquidity
for all potential investors. Acquisition of a company or a company merger is the
most probable exit strategy made unless the company revenues and market sector strongly
suggests an IPO opportunity.
Entrepreneurs who seek capital for their start-up companies will eventually be rejected
by most investors. There are numerous reasons as to why investors decline a particular
deal. A strong management team with a proven track record, geographic location for
a given venture, and industry preference are just some factors angels look at when
deciding on a specific investment. It is possible to raise needed capital for a
venture simply by doing research on various investors and making sure their company
meets the potential investorsâ preferences.