Spoiler alert: Angel investors are in it for the money. While there is a social component for angel investors to stay integrated in the industry, their underlying goal is to make money on their business investments. These investors generally want to see a 10x return on their investment in the next five years. For example, if they invest $2 million for 20% of the company, valuing the company at $10 million, they want to see an estimate that the company will be worth approximately $100 million in five years. This would allow them to cash out for $20 million or 10-times their investment.
Your chance at getting funding starts with your business plan. You need to show angel investors the following:
- Your business is unique and competitive. This doesn’t mean you need to invent groundbreaking technology, but you better be able to prove that your product is better than all the others currently on the market.
- You completed your research on the total market size for your product and how much share you can grab in five years. Remember that angel investors typically like to see 10-times their return on what will be at least a few hundred thousand dollar investment. That means that total sales for your product or service should be at least $100 million or you better have a strong plan to take significant market share.
- Know how much funding you will need in the next five years. Angel investors are willing to make multiple investments but they want to know exactly how much you’ll need over their investment period. Do you expect to be mass-producing your product after an initial stage of testing the waters?
- Know the profits. How much it will cost to produce your product, manage the business, and the selling price?
- Have a strong management team. Success is 1% inspiration and 99% perspiration, and angel investors know this best. They look for a strong team, with members who have been successful before or have significant experience in the sector.
- Have a strong pro-forma statement. Most entrepreneurs are not finance people, so having someone on your team that knows financial statements is a big plus. Pro-forma statements are your financial statements: income, balance sheet and cash flows, for the current year and estimating out over the next five years. You use these statements to show how much money the company can make and how much it will be worth at the end of the period. Angel investors want to see all the assumptions and estimates you used to build your financial statements, and they need to be realistic.
- A good pitch. Your presentation must be direct and demonstrate a real advantage over the competition. The presentation will likely be thirty minutes or more, and you’ll be faced with more questions from the investor(s) for half hour or more.
- Know the minimum amount of money that you’ll be happy with and have a negotiating plan. You may be asking the investor(s) for $1 million for 10% of your company, but this doesn’t mean that the angel investors are going agree with your evaluation. Be prepared to walk away from the table if they can’t meet you at your minimum amount. It’s better to walk away than accept a deal with which you won’t be happy later. Remember that you will be working with the investor(s) for up to five years if you accept their money, so you better be on good terms.
- Have a consultation with a patent lawyer. Many entrepreneurs put off this expense, but it is crucial to protect your intellectual property. Many investors are interested in investing in a company who already has all legal questions out of the way.
The bottom line, know the ins and outs of your business. The more you know the better you will look in front of any potential investor.