As angel investment increases and the cost of starting a company decreases, money has become a relative commodity when it comes to raising funding. The Center for Venture Research reports that both dollar and total number of angel investments were up for a second year in 2012, a trend likely to continue with the passage of the JOBS Act opening the private market to individuals and the advent of crowdfunding.
According to Angel Research Institute, traditional venture capital firms contributed less than 2% of the total funding for seed-stage companies in the last decade. Money alone is no longer the only aspect to consider when looking for investors. Aided by this rise of angels, good companies have many options for funding, and with their pick look for firms and individuals that bring more to the table.
If investor-hunting isn’t about about the size of their checkbook, what process should you employ to make sure you find the best fit?
What value-add investors have to offer
What should you look for in an investor? So-called “smart money” can take many forms, and it's wise to fill your investment round with investors who can assist in at least these areas:
Often while starting out, investors will take part in deals together and help each other learn the ropes. Your investor should have the mutual trust and ability to bring others to the table both now and, if necessary, in the future. Using AngelList, you can get a sense of what other investors a person is connected to and who they invest with most often.
Most early-stage investors have a network of mentors they rely on to work with their portfolio companies. Smart founders should ask their potential investors about the mentors available to them, how these mentors are selected, what kind of access they’ll have, and how they are held accountable. A good investor will keep close track of feedback from their portfolio and consistently build relationships with talented new potential mentors.
Experience and Support
Ideally, you want to look for investors who have many years experience either within your industry or market. They'll be able to provide been-there-done-that insights and help you navigate the specific challenges that come up as you grow your company. Some may be founders of successful companies, while others could be corporate veterans with deep practical skills and it’s important to consider how both competencies can be helpful.
If a person has both deep industry experience and a few investments under their belt, they've likely built up an extensive network of contacts. The ideal investor is one who can make introductions to customers, suppliers, and partners that would otherwise be hard to reach. Take a look through a potential investor's LinkedIn profile to see who they're connected to, and whether these contacts could potentially be impactful down the line.
Investors are often called on to help source a big, high-level executive hire, whether that's a CTO or VP of Marketing, and use their pull to bring in an experienced operator as things ramp up. However, also consider using your investors in a similar capacity for your early hires. In addition to asking for candidate referrals from their network, consider how a personal phone call from a respected investor may just help sway a key engineer to come onboard.
If not money, what are angels looking for?
Understand that angels get into investing for very different reasons, and it varies person by person. Some see it as an altruistic way to give to companies they believe in, or to give back to the business community that made them by helping those just starting out. Others do it for the enjoyment they get out of being involved.
While some gamble for the big-shot, high-profile financial return, it's usually not only about the money for investors either. The ARI study supports this, finding that:
- 52% of all individual company exits resulted in a loss for angels
- 39% of angel portfolios return less than invested
Keep this in mind when talking with potential investors and ask questions, such as
- “What are you trying to accomplish through angel investing?”
- “What about my company excites you as an investor?”
These questions and the dialog that ensues will help you discover their motivations and build the initial relationship. You can then use what you learn to determine if their goals align with your vision and, if so, tailor your pitch to the investor directly.
How can a founder decrease chances of failure?
Research shows that two key factors in influencing the successful outcome of investments are the investors’ industry experience and their involvement with the company.
Investment returns increased by a factor of two if a company was related to an angel’s main area of expertise. This means that as a founder, it pays to make sure you have investors who can fill in your knowledge gaps and anticipate industry and market trends.
However, all this expertise goes to waste if it’s not being put to use within your company. When angels spend time with a company a few times a month they averaged a 3.7x return on their investment over four years, compared to about half that, for those who only stayed in touch occasionally throughout the year.
All this shows, once the checks have cleared and your focus returns to your business, it pays to have a plan in place to make the most of your investors. After all, there’s a reason they’re called angels.
- Use AngelList and LinkedIn to match investors to industry experience and look for patterns among those who tend to invest in companies together.
- Match your vetted ideal investors with the value they can provide and use this to prioritize your target outreach list, considering all the areas referenced above where you may need assistance.
- Talk to investors upfront about the time they’re willing to invest, what that their involvement would potentially look like, and what they’re looking for. Consider reaching out to a few companies within their portfolio as an additional reference point.
- Have a plan - Involvement from investors is correlated to successful company outcomes, so once an investor is in, put together a personalized involvement plan with specific requests and areas where you expect their help. Share this with your investor and set regular times to check in and update the plan as needed.