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How do Angels decide what to fund?

X

Because Angel Investors are all individuals, it's hard to determine the exact type of company each person will decide to invest in. There are obviously a few boxes a startup must check in order to be considered, but wondering if there are certain things about a company that make them more attractive for an Angel investor?


14 Replies

Bill Kelley
3
0
Bill Kelley Entrepreneur • Advisor
Business Mentor
From what I've seen, angels are most attracted to: 1.) industries in which they have direct experience and 2.) geographically local startups.

Beyond that, the ideal investment parameters are similar to VC requirements: 'hockey stick' profit projections and 4X/+ ROI within 18 months or so.
Peter Kestenbaum
1
0
Peter Kestenbaum Entrepreneur
Advisor, Investor, Mentor to Emerging firms
Industries or areas they know... ( If I have financial resources because I ran a chain of 9 retail outlets during my working career, I look to fund retail )

Areas where they have contacts who can add value or make a difference in their investment.. (frequently the same but many times not .... )

Areas where they have invested prior.. You might find someone who funds music service startups...
Peter Baltaxe
4
0
Peter Baltaxe Entrepreneur • Advisor
Consultant, product leader, serial entrepreneur
Here's my perspective as an angel investor. The short answer is similar to that of VC's. Team, market size, traction. Most angels I know discount the financial projections completely. Of the above criteria, assuming the boxes are checked, I look for traction. I don't have time to become an expert in a particular product category or core technology, and so at the end of the day, I look to the see if the intended customer (who understands their own needs the best) is voting with their wallet. I stick to industries that I know, and I look for products for which I might be a customer either as a consumer or a professional. For example, I don't know how to evaluate products for tweeners; I can't get a gut feel for whether they will take off. But I can more confidently evaluate products for parents of small children, because I am one. Find investors who know your space or are potential customers for your product. In addition to potentially investing they can be great informal advisors and can make relevant introductions for you.

I also look for products/services that are pain killers rather than vitamins. The product should solve a big pain point for the customer, and it should be dramatically better than what they currently use. Products that are only slight improvements over existing solutions will struggle to overcome the customers' inertia and risk aversion.
Peter Bartnik
1
0
Peter Bartnik Entrepreneur
Product and Business Development Executive for Software and Services
1. Industries or technologies the Angel knows.
2. Industries or technologies the founder has experience in, and some degree of mastery/competence
3. The market segment targeted, then the opportunity as described by the founder.
4. Competitive activity in the segment. Has the segment/opportunity already been VC funded and to what degree?
4. Most important, the founders/team track record, and/or their ability to describe the industry/opportunity landscape and think on their feet.
Leo Lam, PhD
1
0
Leo Lam, PhD Advisor
Product development executive, serial entrepreneur and Angel Investor
I agree with all the three Peters (what's the chance of that?!) above, and Bill, too. And there isn't much to add on that front, but I can add some suggestions on findingthese Angels with the understanding above.

It is really not that different from Venture Capital firms except that it is most likely an individual, instead of a firm. Even VC firms rarely "venture" out of territories/industries that they understand well.

I think it is clear that finding these Angels, who know the industry you are in, can be difficult since there is really no centralized list for accredited investors with industry info (this might be a great startup idea). For tech, it's not too bad, but for any other industries, it can be a tough job. Well. fundraising is a full-time job all by itself.

A good way to find them would be to go to Angel groups, like the Keiretsu Forum(international exposure) and other local Angel groups locally, like the Alliance of Angelsin the Northwest US. Another way that I have told other companies to find the right investors is togo on websites like Crunchbase, and look up companies similar to yours. Some of these companies' listing include their investors all the way back to their beginning. Most of these Angels are very accessible on LinkedIn and some would even list their emails.
Omar Hakim
1
0
Omar Hakim Advisor
Technology Commercialization & Patent Monetization Professional | Expertise in Management Consulting & Startup Investing
Hi Ryan, Typically, angel investors are members of angel networks. Most angel networks will poll their members and determine what kinds of deals their membership wants to see. You can contact the executive directors of these angel networks before applying and ask about their preferred deal profile. That will save you from - for example - pitching an iPhone app to an angel network that wants to see early stage oil & gas deals and late stage medical device deals... I recommend you contact the Angel Capital Association ( www.angelcapitalassociation.org/) for a current list of reputable angel networks. Good luck! Best Regards, Omar Omar Hakim Managing Director, Hammersmith Ventures m: (512) 577-7000 e: [removed to protect privacy] w: www.hammersmithventures.com
Rick Normington
1
0
Rick Normington Advisor
Dean, Dept Chair and Professor at Sierra Nevada College
First, since angels will invest in start-up or even pre-start-up ventures - whereas most institutional VCs will not - they take more risk hence look for higher ROI opportunity and scalability. Second, most angels tend to focus on an industry with which they're especially familiar or for which they have a special personal affinity.
Stephen G. Barr
0
0
Stephen G. Barr Advisor
Independent Snowsports Journalist, USSA Masters Ski Racer, Advisor @ World Pro Ski Tour
My criteria is generally as follows:

1) Strength of Product/Service
2) Strength of Team
3) My Gut
Sean Hurley
0
0
Sean Hurley Entrepreneur • Advisor
Strategic Marketing Leader with strong financial results for growing organizations
Usually, Angel investors are influenced by individuals within their own network. Companies need to penetrate the angel's network via referral for consideration...that and very very attractive margins with little risk...
Ming Tsui
0
1
Ming Tsui Entrepreneur
HabitatForAll.org
My take on angels is they are actually harder to get funding than from venture firms
because they are people who got burned many times before. Second point is they
are not billionaires with too much money to throw around.

Good news is there are not many ideas or projects that one can choose to invest
that will be 100% success. This is good news for start ups because angels
look for at least 60 to 70% probability of success record. Even they can't tell
which venture or idea will turned out to be successful. Basically even angel
investors are gambler but good odd gamblers. This is why they are successful
and why angel funding is a successful investing way to make money.

All about odds of say 6 failures with 2 to 3 success that turns out on top
of the losses from those 6 failures. That is what angels actually gamble for.
Any investment is a gamble somewhat. Success comes from early hard work
and coming up with the great idea and a good team to execute that venture.
This is what angels look for.

Angels cannot tell some ideas are bullet proof of success since such start ups
are probably in the very early stage or maybe it is just an idea on paper or maybe
a small prototype done. Remember Apple computer, the first investor was actually
the store electronic shop that buy 50 kits from Steve Jobs. He was actually Apple's first
angel investor. The second investor was that retired venture investor, forgot his name.
That invested his own money. When Apple grew, that guy knew people who can invest
more money into Apple. So having connections is also very important. This is why I
tell people make friends with anyone who is richer than you especially make friends
with anyone who works for venture firms or even banks even the doctor you see
for your pain. These high successful people do invests their money to build more
wealth so they kind of know other people who also invests. Sometimes all it takes
is one person connection that could grow into a larger network of connections.

It is very tough to do a cold call asking someone for investment money. Or even
pitch to angel or venture firms if you don't know them directly but if through someone
who knew the angel investor or venture investor than there are great chance for
further meet ups and discussions and even go front process of other start ups
since there are many start ups maybe way in front of the process.

Sometimes even the best ides are tossed to the back or just sitting under other
proposals. But if you have connection, your file will be on top for sure. If your
project looks interesting, they will probably fund your project. Remember, actually
no one will know some ideas are successful or not. Don't believe what people say
that angels and ventures can look at something and know right away it is the next
Ebay or Facebook. If they can tell means they can tell the future, Investing is all
about odds of good reasonable gambling.

I was in one of those angel pitching nights where start ups pitch to a panel. I can tell
you this. Most of the ideas are just so so kind of ideas. Nothing striking but a venture
is just a step toward something that seem small but big in future efforts and evolution
as a company grows. Sometimes even the founder have no idea how it evolves.

Example is Amazon where he was trying to sell books online. This way he saved money
from having a store front and paying for rents for the store front so he can offer lower
book pricing. This is just basic retailing idea and as you can see now how Amazon has changed
as it grew and evolved. So, any early angels or even venture firms could not tell from the start
how Amazon could be a great success. This is why venture firms sometimes missed to see
the big picture and missed out on opportunities.

This is the good news I have for any start ups. You could have a lousy idea but if you can
pitch to people your abilities and most likely they will invest in you and your ideas since they
know ideas iterate all the time becoming more focus and better for the market.

So, don't believe in the fact your ideas are not top notch on paper. You determine how to scale.
You determine how big you want to grow your business. All business came from hard work, smart
work, and just be honest toward your customers.

good luck.
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