In my role as a investor, entrepreneur, merchant banker, security incubator manager, defense and intelligence community technology scout and entrepreneur mentor, I have spent decades separating pretenders from contenders in the startup world.
Often I am asked to explain what angel investors are looking for. My advice falls under three general categories: what angels are looking for, what warns them off and what attracts them. This column is about the first category. More on the others later.
My first advice would be that you not cold call investor prospects. Find a networked way to reach them through a friend, an attorney or business colleague. Unsolicited plans frequently don’t get read.
Angel investors understand that angel investments occur early in the product development timeline, but still, they are investing, not buying lottery tickets. We want to fund a proof-of-concept pilot, or the growth of a startup that comes after a successful pilot. Development funds need to come from friends and family or grant funding. And angels are always encouraged when they see that the founder proves their commitment and belief by having skin in the game in the form of their own funding, like home equity lines of credit.
Angel investors need an indication from the market that it would adopt your new product or service. That’s best shown by successful pilots and lots of customer feedback. Almost half of all startups (42%) fail because there is no market need. We are looking for evidence that entrepreneurs are addressing real problems; not just delivering something that simply is nice to have. We are looking for a painkiller, not a vitamin.
Investors also look for evidence that entrepreneurs are realistic about management. Engineers are rarely good at sales, and frequently have nominal business experience building a company. We like to see founders that recognize they will need a professional CEO as the lead businessperson, as well as sales people and other skilled professionals, to build an investable business. There’s nothing wrong with a lifestyle business—just don’t ask investors to fund it.
We also look for businesses that are profitable, repeatable, sustainable and scalable. Customized solutions are not usually scalable business models.
A final comment: Investors rarely sign non-disclosure agreements, just because we see so many deals. We are not looking to steal businesses, but to provide the capital for somebody else to make a business grow. Besides, if you can’t tell me about the business without an NDA, you likely will have difficulty explaining it to sales prospects or strategic partners.
Roger London is CEO at Corporate Links, his “last” new company in Baltimore. He has worked for 25 years as corporate venture capitalist, angel investor and technology scout for the defense and intelligence community. He has worked with startups and Fortune 500 companies as a principal, investor or strategic/business planning advisor in almost $1 billion dollars of transactions and awards.