Raising funds to run a business can be very challenging. Most often; you don’t even know the key metrics investors use when assessing a business. This is a brief guideline on what most angel investors look for in a startup.
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What is an angel investor?
An angel investor is someone who provides early-stage capital to the business. This is usually a seed investment, mostly used to help set up the actual business. Angel investors are high-net worth individuals; who have made their fortune elsewhere; they’re different from venture capitalists because they are not only interested in the profits but the business as a whole and helping entrepreneurs.
For this reason; most angel investors end up playing an active role in most startups that they invest in. There are a number of angel investors in South Africa, mainly found in Cape Town and Gauteng, getting in contact with them is also not difficult.
The business concept
Most angel investors will look at the business concept first before anything and generally back business concepts that they are familiar with. Knowing this could save a lot of people’s time, this is why some entrepreneurs make hundreds of phone calls before getting through to an investor that really understands the business they’re trying to build.
If you are building a tech company; then just focus on angel investors that usually fund tech companies; don’t waste your time approaching people who are in fashion. As mentioned above, most angels want to play an active role in the business; to help assist the entrepreneur.
Someone who is not familiar with your business concept will not invest in your startup, not as an angel; he/she might invest further down the line when the company has proven its business model.
A good management team
This is where the sole founder struggles, most seasoned angels want a solid management team. Some invest in the team more than the business; believing that a team with solid credentials will have it easier than a team with none.
The team should comprise of people who have experience, not only education but experience as well. This puts a “one man team” at a disadvantage. You can still get funding even without any team but the angel will pressure you into forming one as soon as you get the funds.
Some angels want to know how your business has been performing on the critical parts of the business. This applies to businesses that already have a product that is on the market. If your product is already on the market then investors want to see traction behind it, they want to know how many people have ordered or are currently using it; the level at which you have marketed, everything.
It’s is an app or software; then they want to see user metrics; they want solid metrics that they can use to make forecasts. This is also the danger of seeking investment when your product is already on the market; you have to have numbers behind your claims.
What’s your unique selling point; what is it that you are doing that the competition is currently not doing? Is this enough to attract people to your business, can it be a selling point? These are some of the questions that you will have to answer. You have to be doing something different from the competition and not just be a “me 2”.
Other factors include market size and potential for growth, some angels simply won’t work with companies that will be worth a few millions at best; they want to work with companies that can be worth north of R50 million or hundreds of millions.
This was a brief overview of what South African angel investors look for in startup. They also take a hard look into the market size and the potential growth of the business. Do you have any thoughts or questions? Comment below.