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Five Factors Angels Look for in an Investment Opportunity
by Hal Shelton
April 3, 2024

Are you thinking of approaching an angel investor to put money into your start-up or to help you scale up? Before you start contacting local angels, you should understand what they look for, so you make sure you are approaching the right angel groups and providing them with the information they need to make a “go” investment decision.

Here are important factors to help you find the best angel investor for your small business:

Do You Fit the Bill?

Before looking at the specifics of any investment opportunity, angels will determine if there is a fit with their investment approach.

Some angels invest in companies only in their state or region, while others invest only in certain industries: the most popular being health care/life sciences, enterprise software, internet marketing, mobile apps and related technology, and clean tech/renewal/green energy. Some have other criteria like investing only in women-owned businesses or companies founded by military academy grads and veterans. Others are interested only in companies in particular development stages: seed, A round, or B and later rounds.

If the angel group is actively engaged in their investments, they may require a board of director’s position.

About 95 percent of the 565,000 companies started each month will be operated by their founders for many years. Angels are not interested in these companies. They’re interested in the remaining 5 percent that have an exit plan, since this is when they get a return on their investment. All angels will ask you about your exit plans—when you intend to sell your company and cease involvement in your creation.

The Top 5 Factors

Once a fit is established, angels will look at the following five factors for each investment opportunity. While the factors are similar across angel groups, each will have its own idea on the importance given to each.

Factor 1: Management and Management Team

  • Is the founder/CEO tested in the current company?
  • Does he/she have a strong CV with relevant experience?
  • Is the founder/CEO coachable?
  • Does the founder/CEO have experience starting, growing and exiting companies; in other words, is he/she a serial entrepreneur?
  • Has the management team worked together before, especially in difficult situations?
  • Do the other management team members have strong CVs with relevant experience?

Factor 2: Product or Service

  • Does the product or service have a clear and tested value proposition with multiple customers?
  • Does the product/service have some market traction? Is it more than just an idea?
  • Are favorable customer experience references available?

Factor 3: Competitive Landscape

  • What are the barriers to entry by competitors?
  • Is there any enforceable intellectual property?
  • How long would it take a well-heeled competitor to copy the product/service and obtain market traction?
  • How many viable competitors exist?

Factor 4: Market Attractiveness

  • Is the addressable market several billion dollars?
  • Does the company have the potential to $10 million in annual sales? How long will it take?
  • How much market penetration can be achieved in the first year?

Factor 5: Financials

  • How long will it take the company to be cash flow positive?
  • What is the magnitude and stability of cash flows?
  • Is the current company valuation attractive and justifiable?
  • Assuming the company achieves its milestones with this investment, when and how large will the next funding be?
  • Have the founders, family, and friends already invested in the company? Are all current investors participating in this round?

Angel Hunting

Ready to start your search? Most angel groups have a website listing their investment approach, members and often the names of their portfolio companies. Following are resources to help you narrow your search:

  • Angel Capital Association: This trade organization for angel groups lists members by state and accredited platforms.
  • Angel List: This and other such platforms connect companies seeking funding and angel investors.
  • Google “angel groups in your state/area” or “angel groups investing in your business sector”.
  • Ask your lawyer and accountant for their recommendations.

Key Lessons

  • Angels have different investment approaches; find one that matches your situation.
  • Provide angel investors with the information they need to make a “go” investment decision.
About the author
Hal Shelton
Hal is a SCORE mentor, active investor in early-stage technology companies and Amazon bestselling author of The Secrets to Writing a Successful Business Plan. He is passionate about helping small businesses start and grow. Previously, Hal has been a CFO and board member for NYSE/NASDAQ publicly traded companies and nonprofits.
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