There are several factors that an Angel
investor will analyze when considering an investment opportunity. Some of the more obvious factors include: the
product or service, the business plan, the founding, intellectual property,
market validation, and the investment itself.
In addition to these factors, there are some less obvious reasons that
will make an Angel investor pass on a deal.
We’ve highlighted some of these reasons below:
1. Breach of Trust or Confidence
Nothing will turn an Angel way faster than
untrustworthy character. Stay clear from
misleading comments, pretending to know answers that you don’t, or showing any
sign of flaws in integrity. While
investors expect some amount of hype, don’t go so far as to lie or be
unrealistic about your assumptions.
2. Lack of Homework
Most Angel investors are as sharp as a
tack. They come to the table ready to
quiz you in order to find a flaw in your business. If you haven’t don’t your homework and your
either not able to answer their questions or have not provided the information,
they need to assess your business they will be sure to walk away. Additionally, an Angel will find it
disrespectful that you are asking for their money when you haven’t done your
due diligence to make sure it’s a sound investment.
3. Financials Do Not Pass the Smell Test
Yes, Angel’s want to see hockey stick
revenue numbers. But you must also paint
a plausible picture based on realistic assumptions. An Angel investor should be able to clearly
see the growth drivers that defend your revenue projections.
4. Underfunding
Entrepreneurs often underestimate their
expenses or their run way before breaking even.
Angels are cautious not to underfund a startup as this will cause them
to write additional checks down the road or bring in new partners which will
dilute their stake. There is a tendency
to request less than what is needed in hopes of raising the potential to raise
enough capital to get the project off the ground. This is a losing strategy and Angels know
it. An Angel investor would rather
provide no funding at all than underfund a company.
5. Unrealistic Valuation and/or
Investment Terms
Angel’s will often start by asking how much
capital you are seeking and for what stake in the business. They do this because if your valuation and/or
investment terms are so far off from what they are seeking, it won’t matter how
good the rest of your pitch will be as you’ll never be able to come to an
agreement. You valuation is not based on
what you think the company can achieve with their capital investment. Your valuation is based on what you have
achieved to date. An idea is only worth
so much. What raises your valuation is
technology, your management team, your business plan, paying customers, etc.
6. Unclear Exit Strategy
Angel investors are looking for startups
that have the potential to provide a large ROI.
Angels realize their ROI during a liquidity event. The exit strategy is the entrepreneur’s
opportunity to demonstrate what a probable exit looks like, when it will likely
occur, and what type of return can be expected.
One of the bigger mistakes that an entrepreneur can make is to neglect
the ultimate motivation of a potential Angel investor: a large return on their
investment.
7.
Incomplete management team
Investors heavily weigh the importance of
the startup team when evaluating an investment opportunity. The reason is simple, the company will face
adversity, things will go wrong, and the plan will change. But, if the right team is in place the
company can overcome the adversity, fix the issues, and adapt the plan. You should plan on having a team member,
service provider, or advisor for every part of the business other than your
area of expertise. For example, if you
are a tech expert launching a mobile app, you will want a team member, service
provider, or advisor fulfilling the following roles CEO, CFO, sales, and
marketing. At this stage, it is fine for
one person to fill several roles so long as they have the expertise to fill
these gaps at their fingertips.
8. Lack of flow through
Angel’s want reliability. If you promise to follow up with additional
documentation, research, or a phone call – do it. If you drop the ball on something now, it’s a
pretty clear indication that you won’t deliver on your promises in the future.
