This article is a continuation of Part 1 where we discussed the general requirements entrepreneurs needed to meet in order to attract Angel Investors.
In that article, we expressed that one of the most important characteristics that Angel Investors look for in startups is the viability of their exit strategy. In brief, an exit strategy must provide the Angel Investor with a 5-10 times return on investment within a 5-7 year time period. This article will review the financial requirements that many Angel Investors look for in firms that they are considering investing in.
Most Angel Investors seek initial investments of $200,000 to $2 million that generally garners the investor 15 – 30% of the equity in the company. A 5-10 times return on investment would require that they earn $5 - $10 million on every $1 million invested. If an Angel Investor were to provide $1 million in capital for 25% of the company's equity, your company would need to be acquired or successfully file an IPO for $20 - $40 million dollars.
Angel Investors know these numbers inside and out, so what they look for in your business plan, is the probability of your company being able to reach at least a $20 - $40 million valuation within 5 – 7 years. One way they evaluate this is based on market analysis, market size, and expected market share. Remember, most investors want companies that are going to dominate the market that they are entering, not simply obtain a 1-2% market share. If you are entering a $50 million market, your company would need to obtain nearly 50% or greater of that market to reach the required valuation. The market you are entering must be large enough for you to confidently obtain a large enough market share and valuation within a reasonable amount of time.
The Angel Investors on the panel tended to favor companies that had low capital requirements. The reason for this is that Angel Investors fret over being diluted in future investing rounds if your company needs to raise significant funds from venture capitalists in the future. If the additional capital that an Angel Investor provides you does not provide you the capital you need to get to market, it may prove difficult to raise capital from Angel Investors.
Lastly, Angel Investors want entrepreneurs to have a clear plan for how they are going to spend the money that they raise. They want to know that you acknowledge the core gaps in your business, whether it is key personnel, technology, or other missing, but required component. As an example, Angel Investors will want to hear you say that you need the money because to hire a seasoned VP of Marketing to help us get to market and obtain the market share that we require to achieve our financial projections. Angel Investors know the gaps in your business, but if you can acknowledge those gaps and assure them that the money you are raising will be used to fill those gaps, you stand to build strong credibility among the investors.
When evaluating your need to raise capital, ensure that your market and financial projections meet the minimum requirements that Angel Investors have (5-10x return on investment). Be certain that you're projections include a solid, but realistic, market share penetration in the market that you are entering and analyze how the money raised will be used to fill key strategic gaps in your organization.