The startup industry has become a growing source of financing for new businesses, and the public market is playing an increased role every year. Angel investors are also growing in numbers, eager to find and support these ventures with timely investments. The challenge for angels is that many new companies consider varying degrees of success, challenges, and potential returns. As an angel investor, you might find yourself frustrated that many startups are at such early stages of development, and hard to assess their potential.
Angel investors are anyone who invests in startup companies, whether in their seed stage or at a later stage. They typically have a deep technical knowledge of the sector and can provide valuable feedback on the business plan and strategies undertaken by the startup. In addition, angels can provide capital to new businesses in ways that may not be possible through any other financing source.
As an angel investor, you can play a critical role in the success of startups by assessing them early and providing crucial feedback to management. The six steps below should help you do that, but even with these simplified steps, it is essential to remember that there is more to it than simply reading a pitch deck or business plan.
Get to Know the Business
This step is crucial for an investor in the seed stage. Your role is to understand the business and its potential, and the industry it works within. To get this information, spend time with management talking through their go-to-market strategy, technology platform, and target market. Be sure to ask questions that help you understand how they will grow and make their company successful.
Assess Their Risk Assessment
The best business leaders know how to take risks without being reckless. They also know how to assess risk and take action accordingly. With this in mind, angel investors need to assess a startup’s risk assessment. Let’s say you’re thinking about investing in a comedy club trying to open new locations in other cities. Do they have their employees participate in active shooter training drills? Are they prepared for the possibility of another pandemic-related lockdown? These are the sorts of things you need to know before choosing to put your money behind a seemingly promising startup.
Determining financials for a venture capital deal may not be relevant for angel investments. However, startups are constantly raising capital through rounds, and knowing the numbers is essential. Angel investors want to understand how the business will grow, whether they are in the seed stage or later. Founders should be able to forecast where they expect the company to be at all locations.
Understand the Growth Drivers
Understanding the potential of a business as an angel investor will be more challenging than assessing its financials. The critical question that needs to be answered is how a startup will grow. This step involves looking at growth drivers, e.g., technology, market penetration, marketing, sales, etc., and whether they are realistic and achievable. Growth drivers are critical because they will use them to assess the growth potential.
Understand the Competition
Assessing competition is also a critical step for an angel investor. Although competition can be challenging, it is essential to understand how startups will differentiate themselves from the competition and position themselves in the market. The key is not to look at a single idea but instead to know how the company will execute its strategy and position itself in the market against its competitors.
Assess the Team, Execution, and Financials
This step is vital for both seed-stage and later-stage investors. The team is critical because it will execute all of the above. Management should have plans for hiring the right talent to execute their strategy. Investors also like to see that management has a strong track record and network. As an investor, you also want to see that the company has a sound financial plan, starting with revenue projections, investment needs, and a breakdown of how it will utilize the capital.
Share Your Work
Angel investors should not rely solely on their judgment to decide whether an investment is suitable for them. Instead, they should share the work they did in the previous steps with other experts in the field that they trust, who may be able to provide more critical feedback. The reason is simple: as an investor, you want to protect your investment, and it is essential to have other eyes look over your work before making a final decision.
The steps outlined above are just a snapshot of what an investor should be doing when reviewing a startup. An angel investor is tasked with evaluating many different areas to come up with a conclusion. For example, suppose there is a company that has raised funding through rounds and needs more. In that case, the investor should evaluate whether they will receive the capital they need or be better off securing new investors that may have a better market position or have more money in hand.