Preparation is everything – is your startup ready to meet an angel investor?

Angel investors are a great way to secure early financing for your business, giving you the financial jump-start you need to reach the final stages of development and market entry.

But many new business owners are at a loss with what to expect from investors. In a survey of experts in the Middle East and North Africa (MENA) region, 31% said that entrepreneurs didn’t understand what investors were looking for, and 30% said that entrepreneurs in the region didn’t know how to pitch their ideas effectively.

As a startup owner, how confident are you in your ability to attract angel investment? Do you know what angels are looking for, and how to secure funding from them? 

What is angel investment?

In order to grow, startups often need external financing. A common way of securing additional capital is through angel investors – usually high net worth individuals with experience in building businesses, who can provide early-stage funding of usually between USD 100,000 and USD 3m.

Angel investment is often directed at companies with promising but high-risk ideas, and has historically provided financing for pioneering businesses such as Bell Telephone, Ford Motor Company, and even Apple.

There’s been a general upward trend in angel investment: in 2013 the total value of angel investments reached USD 24.8bn, an 8% increase from 2012. And it’s now a key source of capital for startup owners around the world. Here in the UAE, the number of angel investors nearly doubled between 2011 and 2012, and three times as many companies were getting funding in 2012 as in 2009. In the MENA region, in 2014 there were over 200 institutions actively supporting entrepreneurs – seven times higher than in 2000. 

Why do startups choose to engage with angel investors?

Funding from an angel investor, whether it’s a one-off cash injection, or ongoing support over the lifecycle of a startup, can prove vital in supporting and growing your venture.

But it also brings wider advantages that may even prove more valuable than the money itself. For instance, angel investors often have experience in the industry in which they’re investing, and can act as a mentor during the early stages of your business. With the benefit of their wisdom and hindsight, you’ll be better equipped to avoid pitfalls and mistakes, and navigate difficult decisions. An angel might also take on the role of brand ambassador, championing your product or service and backing up your reputation. Not only can this boost your customer base, but the additional credibility will improve your chances of securing funding further down the line. 

What are angel investors looking for?

It’s certainly not easy to land an angel investor. Typically, angels will consider a whole host of different factors surrounding an investment opportunity before taking the plunge. After all, no matter how much money an individual has, they’re not going to hand it over unless they’re confident the cash is in capable hands and will be spent carefully and expertly.

So what will an angel investor be looking out for in your startup?

1. A great pitch: Most angel investors are used to sitting through lengthy pitches and presentations, so you’ll need to work hard to grab their attention. Take some time to think of a unique, creative approach that will engage your potential investor on both a personal and professional level; and will distinguish you from the competition. The best ideas are those you can explain quickly and concisely, so make it punchy and to the point. The fewer slides the better, and keep it to a maximum of 10 minutes – any longer and you’ll lose their attention.

On the day, make your pitch with enthusiasm and confidence, and don’t be afraid to make a strong impression. Show your depth of your expertise and knowledge. Demonstrate how well you understand the mechanics of the market, the strengths and weaknesses of your competitors, and precisely how your product is positioned relative to the competition. Knowing your product back to front will help prepare you for any unexpected questions.

2. A promising team: When it comes to angel investment, a great idea will only get you so far. Angels are investing in the entrepreneurs themselves as much as their company and vision. According to a study in the Journal of Small Business Strategy, among angels’ top criteria when considering investments are the trustworthiness and enthusiasm of the lead entrepreneur, as well as the quality of the management team.

Angel investors want to see integrity, passion and commitment in a founder. They want to see a trustworthy and capable group, intent on following through, hitting the major milestones and delivering the best possible returns from the original business idea. From their own business experience, angels know that a strong team is one that meshes well on a personal level, from founders to team members, to investors and advisors. A natural cohesion across the team will reassure them that you’re capable of withstanding the hard work and unexpected challenges that will come the way of your business as it develops.

3. A clear strategy: A business plan can make or break an investment deal. So before attracting an angel investor, make sure yours is clear, comprehensive, and covers all the details an angel investor needs to make a decision.

  • Include a precise description of your startup and the product or service you’re offering, and talk honestly about your (potential) customers. Give a description of the target market and your competitive advantage in that market.
  • Be ultra-clear about your finances. Outline the key figures for your startup, including sales, profits and return on investment, and show your revenue projections for the next three to five years. Be transparent about how much money has already been invested and by whom (including ownership percentages), as well as the capital you realistically need to start or expand, how you’ll use it, and how you plan to finance your startup in the future.
  • Include your sales and marketing plan. How do you plan to reach your customers? How much is it going to cost? Explain clearly your assumptions and metrics, and the strategies you have in place for future growth.
  • Give any other relevant information about your startup, such as the principal owners, key personnel, and any legal and compliance considerations.

4. Evidence of traction: Traction is an important factor for you as a business owner, and it’s equally important to angel investors. They want to know that your product or service has a promising adoption rate, and the higher the better. Give evidence of how your startup is already getting off the ground. Have you run a successful marketing campaign? Have you already sold your product? Put together details of your current customer base, who you have been targeting to date and how, and include big achievements such as contracts, key hires and product launches. Whether you’re measuring it through sales, customer response or market research, the more concrete data you can give to back this up, the better. 

5. Market growth potential: If there’s no prospect for huge yet attainable market growth, most angel investors won’t consider it worth the risk. To get their attention, you likely need to be targeting a global market – large enough that even a market share of 10-15% will have the potential for significant returns. This isn’t to say you need a wide target market; niche target sectors within the wider global market can be just as lucrative.

6. An easy exit: A key consideration for angels looking to invest is their opportunity to exit. When your business reaches maturity, the angel investor will want to earn a return on their initial investment by selling their shares, and they’ll expect you to address this outcome in your investment proposal. So you need to reassure them of a clear path to exit. Explain whether you plan to get acquired or to go public, with scenarios outlining when they might potentially exit their investment and who they might sell their shares to. Giving them attractive scenarios with clear timeframes will put you in a much stronger position to get the financial backing you need. 

Are you ready for an angel investor?

Preparing to meet with an investor can be a daunting prospect, but like anything in business, excellent preparation is the key.

  • Create a compelling, well-crafted elevator pitch and practice it until you’re totally confident and can deliver it with polish, style and pizzazz
  • Put together a well-defined, comprehensive business plan that demonstrates you know your market inside out
  • Offer your investor an attractive and carefully-considered exit strategy
  • Believe in your idea, and don’t be afraid to demonstrate your passion and commitment

There are no real shortcuts in this process. Getting everything in place takes time and effort, and could even raise difficult questions for your business. But a few extra days of preparation will put you so much closer to gaining the confidence and funding of angel investors. And the payoffs, if you do, are immense. Finally, if you don’t secure an investor, don’t be discouraged. Take on board their feedback and keep on trying, until you find your perfect investor match.