I recently attended a panelist discussion featuring several of Silicon Valley's most prominent Angel Groups to listen in on what Angel Investors look for in companies that they fund, the process that they go through, and the advice they had to share for the entrepreneurs in the room.
(article continues below)
The panelists confirmed that Angel Investors and the typical process they have used to fund companies in the past has changed drastically due to the recent economic downturn, however they are still looking for companies to invest in, but be prepared for a more competitive environment with a longer funding cycle.
Angel Investors are often the first professional investors in many startups, outside of friends and families. They typically invest anywhere from $200,000 to $2 million, preferably in a Series A round, which often provides the investors with 15-30% of the company depending on the structure of the deal. Many Angel Investors are often former successful entrepreneurs who like to offer significant strategic value to the company in addition to the financial capital that they are providing. All the panelists agreed strongly that the strategic value that they can provide is often times more important than just the financial capital.
Angel Investors look for many things from entrepreneurs pitching them, however there were two key points that stood out the most. First, it is highly improbable, not impossible, but highly improbable for you to get invited to pitch to an Angel Group by simply submitting your business plan online. Each panelist said that 95% of the companies that they funded were first introduced through a personal or professional relationship, so start networking your way in. Second, aside from the business plan, and all the great financial charts you'll have to share, the most important question you'll have to answer and persuade the investors on, is your exit strategy.
Your exit strategy must be thought out in precise detail, because your company will take very different paths if you are planning on an IPO 5 years down the road or would like to get acquired. Getting acquired is not as simple as many entrepreneurs believe or hope. The panelists strongly agreed that you must lay out a plan to form strategic partnerships with companies whom would be likely acquirers. Angel Investors typically have an exit time horizon of 5-7 years and they demand that entrepreneurs pitching for there money have a clear and practical exit strategy within that timeframe. The panelists all had said that they chose not to invest in specific companies, not because they didn't' believe in the business, but because they didn't believe that the company would be able to exit within 5-7 years.
Another common question that I hear often, that was asked by a member of the audience, was; is it better to go after 5% of a $1 billion market or go after 50% of a $100 million market? The clear consensus on this question was it always is better to go after larger market share from smaller markets. A company with only 5% market share has no sustainable strategic advantage, and with out that advantage, they are an unattractive acquisition or IPO candidate. In part 2 of this series, we'll examine the financial requirements from the Angel's perspective in further detail.