What Are Angel Investors Looking For?

If you’re running a startup or a small business, and you’re thinking about launching an equity crowdfunding campaign, chances are you’ll be relying on backing from angel investors.

So what exactly are angel investors, anyway? Despite that heavenly name, they are not people simply looking to hand over thousands of dollars in cash out of the goodness of their hearts. Angel investors are generally wealthy people who are seeking interesting and promising projects to invest in, in exchange for an ownership stake. They tend to write checks that are larger than what your friends and family might offer, but not as large as the millions that venture capitalists would invest. According to the Center for Venture Research at the University of New Hampshire, the average investment made by individual angel investors in 2019 was $73,700.

Photo by Sam Barber on Unsplash

Often, angel investors are experienced entrepreneurs who have launched their own successful companies and want to help others do the same, offering both funding and consultation — and expecting, in many cases, to have a say in how the business is run. To minimize their personal risk and tap into others’ expertise, many angel investors pool their resources with other like-minded individuals, forming angel groups. Whether working on their own or in groups, angels tend to be people who embrace risk and who seek out the thrill of entrepreneurship, though of course they also expect to earn a substantial return on their investment.

Angel investors are a diverse group, motivated by many different factors — some are looking for mission-based companies doing good in the world, while others are drawn to renegade founders seeking to disrupt the status quo. Some specialize in tech, others in healthcare, others in consumer goods, and so on. What they all have in common, though, is a desire to make a sound investment. Here are some of the qualities angel investors are looking for when considering a new business venture:

1. A qualified team

For many experienced investors, finding a startup with a management team that has entrepreneurship experience, business savvy, a diverse skill set, and broad and deep knowledge of their market is the gold standard, and also a bit of a unicorn. In a 2015 article in the Observer, “Why I Stopped Angel Investing (And You Should Never Start)” Tucker Max describes how rare it is to find a startup with the right people running it: “Over the past 18 months, I’ve probably looked at around 400 companies in many different areas. I’d say that 75 percent were solid ideas, and I’d say that over 50 percent were in potentially huge markets. But I’d estimate that only about 20 percent of the people starting those companies have the ability to actually do the job.”

The goal is to impress prospective investors not just with your enthusiasm and passion, but with your knowledge of your business, your ability to sell your product (or service), and your wisdom to hire the right people to support you.

2. A viable idea with good growth potential

By the time a company is seeking investors, it should have a working prototype (if selling a product) and that elusive but essential asset: a devoted audience. If you can demonstrate, even before being fully funded, that your idea solves a real problem and resonates with your customers, that puts you in a favorable position. You also need to know your market, inside and out, backward and forward. Who are your competitors, and how can you do what they do, only better? Who are your customers? When forecasting your company’s growth potential, be assertive but realistic. Any claims you make must be backed up with sound analysis and in-depth research. Be prepared for the question of how your business will survive if you don’t get any funding — demonstrating your grit and perseverance is critical.

3. A clear exit strategy

Keep in mind, when pitching potential investors, the reason they are investing in the first place: They want to make money. Spell out for them how you expect that to happen and in what time frame. The hope and expectation is that, in a period of about five-to-seven years, a startup will either be bought by or merged with another company, or perhaps even go public, providing a healthy return for investors. They may be angels — and they may sincerely want to help you realize your dream — but even angels like a good profit.