If you are an entrepreneur in the early stage of business and are looking to raise capital for your start-up, early-stage investors such as angel investors would be ideal for you. This is because angel investors are known for making large bets in new start-up companies, hoping to hit a home run on a future billion-dollar company.
First, let us define who an angel investor is. An angel investor is an individual who is exploring investment opportunities and they are using individual sources of capital to invest in a company. The reason why they are deemed as angels is because of the extra value they bring to the opportunity they want to deploy capital into. They do not just plug in capital, they also find other ways of how they can leverage on their experience and background to add more value to the investment opportunities. This article will explore key questions that an entrepreneur should anticipate when they approach an investor;
What would an angel investor like to see before they decide to invest in a company?
Before an Angel investor decides to invest in a company there are several elements that they would like to see in a startup before they decide to invest. The top four elements are;
- They want to see that the entrepreneur has a clear understanding of the problem-solution dynamic. There has to be validity in the problem that the entrepreneur is looking to solve. Validity for an angel investor is emphasised by the fact that entrepreneur understands the product/problem and has a good grasp of how the solution will fit the problem.
- The second thing angel investors evaluate is the steps the entrepreneur has taken to actualise the business idea. Does the entrepreneur have a prototype or a minimum viable product that can be presented from fulfilment or a solution perspective?
- The third element and the most important is the character of the entrepreneur and the team who will be bringing the business vision to life. Since the investment at this stage is an early-stage investment, most likely the investor will be backing the entrepreneur and not the business. Therefore the investor will analyse the unique skill set that the entrepreneur is bringing on board that makes them fit to address the particular need/problem.
- The fourth element is the corporate governance perspective. The angel investor wants to know if there is room for them to add value to the company? For example, if an entrepreneur is against an investor taking a board position in the company then that may become a problem.
What are the most common financial questions that an entrepreneur should anticipate from an angel investor?
An angel investor wants to know three things about your financials; Financial Statements, Unit economics, and the path to profitability.
- Financial statements: An angel investor wants to look at your financial statements. Although the business may be young and you may not have audited statements, it’s important to have management statements that can allude to your previous or current performance as a business.
- Unit economics: The second thing is the various elements of unit economics. And in this, an angel investor will look at; cost of customer acquisition, the cost of product production, and how you price your products and services.
- What are your projections: The angel investor wants to understand your path to profitability, how long will it take you to break even so that they can get a clear picture of how they fit into helping you realise your goal.
Questions to anticipate from an angel investor about market and customer acquisition?
The angel investor wants to know if you have a good understanding of your customer profile. Do you have a clear understanding of who your consumer is and the procurer? For example; If you sell Baby Diapers, your consumer is the baby however the procurer is the parent or caregiver therefore your marketing strategy should appeal to the procurer. Another question you should anticipate is how you are going to distribute your product to market.
In addition to capital, angel investors may also invest human capital. Here is why angel investors do it;
Angel investors invest human capital for 2 reasons; Since an angel investor is already giving you money in good faith in the form of capital, they can choose to allocate someone to the organisation to fill the gaps that you may have in the organisation as a way to de-risking their investment. Or they may bring in someone because they want to protect their interests from a decision point of view, the person may sit on the board of directors.
What would make an investor not invest in an opportunity?
If there is no clear way for an angel investor to extract value from their investment that would make them hesitant to invest in a startup. An angel investor can extract value in two ways;
- By recouping their investment from an exit point of view and;
- By making sure that the investment is not watered down from a value point.
Entrepreneurs should never downplay the value of good chemistry between an angel investor and an entrepreneur. All the other problems in a business can be resolved by additional capital but you can never pump money on bad character. If an investor is not comfortable with you as a person then they may be hesitant to invest in your startup.
What are the advantages of working with an angel investor as opposed to other sources of funding?
The greatest advantage of working with an angel investor is that he/she will be invested in your success. The angel investor will do whatever they can to ensure you succeed including leveraging on their network to bring more opportunities to the business.