What Angel Investors Look for in Startup Opportunities

Getting angel investments is hard but not impossible. Learn what angel investors tend to look for before making a sensitive business decision.

published Jul 10, 2024

As a startup founder, you may be sitting on a goldmine of a business idea, but without funding, your dream will most likely remain that—just a dream. Angel investments may be the missing piece of your puzzle, but you must be smart about playing this game.

Seeking funding for your startup will require you to make your business attractive to investors. Throughout this guide, you will find ideas that will help you position your startup for angel investing opportunities.

What Is an Angel Investment?

An angel investment is an agreement between an angel investor, who typically is a wealthy person, whether in business or not, willing to put money into a startup in exchange for equity. The question, “What is angel investing?” simply refers to the process of making an angel investment instead of the person themselves.

We have seen angel investing happen successfully before with Facebook, Uber, and even AirBnB. But, considering how high-risk this venture is, angel investors will first consider many factors before deciding to take a chance on any business. In the next section, we will discuss some of the things these angel investors look out for and teach you how to position your business to snag an investment.

What Do Angel Investors Look for in Startups?

If you want an angel investor to pump funding into your business, you have to bring more than a solid product to the table. Here are a few things angel investors tend to look for before making a sensitive business decision:

1. Potential Business Returns

One thing you must know about angel investments is that these investors do not intend to throw their money into the void. They are calculated risk-takers, not gamblers. So, do you have a great business idea? Wonderful! A vibrant market you’re about to break into? Even better.

But while this may seem like a win, angel investors want more than this. They want guaranteed returns, and most operate using what we call the 7-to-1 rule. This means that for every dollar they put into a business, they want to get seven dollars back. If the business doesn’t look like it can pull that off, it most likely won’t get the investment.

To position your business to catch their attention and find its unique market value, it must solve a problem. Make investors see this value and what makes you stand out from other startups in your industry.

Then, think about numbers—investors love them. Show them your business numbers and their projections for the future. Draw up a detailed business plan, showing forecasts and how you intend to arrive at the numbers.

Remember that it’s not just about having a great idea—it’s how you can sell it to potential investors to convince them to believe in your dream.

2. A Solid Team and Strong Management

In the eyes of an investor, the team is just as important as the business idea. Bad founders can sink a great business idea, and a bad team is even worse. Angel investors know this and expect to see a team that is equally passionate and experienced so they can give them the extra push they need to turn that passion and experience into a success story.

So, before you pitch to investors, identify the strengths and weaknesses of your team, then plug all holes. For example, if you, the startup founder, are bad at math but a great salesperson, you can hire a good CFO to cover this deficiency. If you don’t have a great track record or experience running a business, get someone with relevant experience to join your team and put them at the forefront of the pitch.

3. Market Opportunity

When it comes to angel investing in startups, the stakes are much higher than having a cool idea or a solid team backing you. The size of your playing field matters a lot, and this is what we call market opportunity. Out of a range of businesses to pick from, angel investors tend to go for businesses that have the potential to break through whatever market they are in.

So, we know for sure that small ideas will most likely not catch an investor’s attention. It can work, of course. But with these things, you typically get only one shot, and we want you to take your hardest swing.

Now you know that a potential investor will most likely check how big your market is and whether your business can make enough money from it. A market that’s too large can also pose a problem because investors can tell that breaking into it will take a lot of time and resources.

Understandably, most will not have the patience for that. Another factor they consider is how fast the market is growing. If the market is fast-growing or at least moving at a steady pace, then you are in a favorable position to negotiate.

4. Traction

If your business shows early signs of gaining momentum in your target market, it can easily catch an angel investor’s eye. Traction is the most reliable sign that your business is doing well. Whether it is from revenue, number of active users, or customer acquisition rate, traction speaks volumes about any startup’s progress.

So, before approaching your targets for angel investments, ensure that your business has gathered some buzz. In your pitch deck, you can include website publications, positive press runs, or even positive reviews from a successful trial of a beta version of your app or product.

When assessing a business for signs of traction, the first thing investors look for is what brings the most money in. They also like to look for customer acquisition costs, churn rate, etc. All these metrics put together give them an idea of whether your current business model is working and if it can be scaled profitably with time.

Another thing investors assess is what gives your startup or business a competitive advantage over others in your industry. So, what sets you apart? It can be a patent or your unique approach to customer service. Angel investors just want to see something they can leverage to drive future growth and sustainability.

5. The Amount of Money on the Table

Another area of strong consideration in angel investing is the amount of money involved. Angel investors weigh multiple factors before deciding how much they are willing to commit to any venture. So, the size of your company, its potential for growth, and other associated risks will play a huge role in this decision.

A foolproof business plan, a solid target market, and a clear track to profitability are some things that will favor your business. Knowing that angel investors are thorough and don’t play with their money, expect that they will demand your financial and operational records.

They will go through these records with a fine-toothed comb, looking for red flags and financial safety nets. This means that in the event that things go bad, they want a guarantee that their investments are protected. Investors also want assurance that your management team has the right resources to push the business forward.

This can be in the form of experienced employees, access to industry experts, or adequate financing. So, anticipate their questions, especially when they ask about your competition. Show them that you have done your homework and that you know where you stand in your industry.

Before presenting your pitch, practice over and over again. Then, seek feedback from your mentors and peers so you can get extra opinions to finetune your work.

6. An Exit Strategy

Unlike you, the startup founder, angel investors are not in it for the long haul. The goal of angel investing is to get in and eventually get out profitably. As a result, having an exit strategy before investing is a necessity for an angel investor.

This exit strategy helps them mitigate their risks and outlines a clear roadmap of how they will get paid when the time comes. It may be through selling their shares to the company’s top people or some other means, like an IPO, private equity acquisition, or management buyout.

Note that angel investors are not looking to make dividends from your business. More than anything, they are willing to sell your startup at some point for a return on their investment. So, as a founder, one of your many goals is to make your business exitable—something someone would want to buy for a substantial sum in the future.

While presenting your pitch, show them the pot of gold at the end. Outline and explain your exit strategy and convince them that a big exit is feasible in the next few years.

Take a “Foreword” Step Today!

Getting angel investments is hard but not impossible. Strategic targeting is key—focus on attracting angel investors in your location and industry to ensure your pitch matches their interests. Make your pitch deck compelling and comprehensive while showing a deep understanding of the market. Above all, have a strong team of experts behind you to guide you on this journey. At Foreword Companies, we can help you with all these challenges and so much more. Schedule a call today to get started.

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