With the startup industry flourishing like never before, it is almost every day that we come across a news-piece about an XYZ startup getting investment from an ABC angel investor. This often sets our curious minds wondering what is that made that particular startup make the cut. While like people, every angel investor is also an individual with different thoughts and ideas. Hence, there can’t be one generalised answer to this question. Here, we bring to you a list of criteria that might help your startup make the angel investment cut.
- Leadership – This is very crucial. The leader of the startup is often the face of the startup in the industry. If you have an experienced and famous face as your CEO then things become quite easy for your startup as compared to its contemporaries. This often happens because unlike the startup, the leader has already proven his/her worth in the industry and people are ready to trust him and invest in his venture.
- A huge Market for the product/service offered – If you need the big investment, you need to have a big addressable market of at least $200 million. A market over $1 billion is considered ideal.
- Intellectual property – A startup looking for the big angel investment should ideally have intellectual property, which is protected by patents, trade secrets, or have the time barrier to replicate.
- Sellable product or technology – The product or service offered by the startup should be something that can be easily used by the people and not something which only looks fancy and promising on the paper. The company should have good revenue figures on display in order to attract that angel investment.
- A no hurdle path to the market – All the licenses, approvals required to market the product/ service should be in place.
- Liquidity – There should be a clear and defined path to liquidity for the investor. A company does not need to have to IPO or be acquired in order for the investors to achieve liquidity. Company buy-backs and revenue sharing have also proved to provide excellent returns to the investors.
- Return on their investment – Let’s face it, almost everyone is there in the business to earn profit and the same goes for investors. Angel investors are likely to invest in those startups where they can clearly see a 5 – 10x return on their investment, or where the company has the potential to buy back the shares or IPO at that multiple.
- Valuation of $4 million or less – With the investors wanting to make a profit of 5 to 10 times on their investment, a startup having a pre-money valuation of $4 million or less is preferred. This varies depending on the type of the industry, geographic location and stage of the business that the investors are investing in.
- Stock – Most of the investors are in favor of preferred stock equity ownership when investing. In equity ownership, the investors and entrepreneurs mutually agree on a company valuation and the investors’ ownership is determined by the amount of money they invest as compared to the valuation of the business in question. Under a preferred stock system, investors get the money they have invested back before other designated investors and creditors.