Is your startup ready for an angel investment?

Finding an investor is perhaps the most daunting task for many startup founders especially when the business is at an early stage. On the other hand, this is no surprise because investments in startups involve a very high degree of risk for investors as the meme is such that 90% of startups fail within the first 05 years of operation. Here we are not going to talk about why startups fail but how an early stage, pre-revenue startup can increase the chances of getting an angel (or a pre-seed) investment.

I have a million-dollar idea! Where can I find an investor?

Well, if you only have an idea, the odds are such that you would not find an investor from anywhere unless;

● You are a serial entrepreneur with a brilliant track record of past successful startups or

● You own an important patent or similar legal right so that there would be little or no competition for your product or service

Although the greatness of the idea can be crucial for the success of a startup business, the mere presence of a great idea without any execution is unlikely to convince any angel investor. The general belief in the angel investment arena is that ideas are worth (almost) nothing unless they are executed. Besides, having an idea is not having a business and thus there is nothing to invest in.

Derek Sivers, a well-known musician and entrepreneur, has an interesting way of calculating the value of an idea. As per Derek, ideas are just a multiplier of execution and it is the execution that can be worth millions as calculated below.

According to the above, even the most brilliant idea without any execution is worth just $20 (20x$1). On the other hand, even a weak idea with a brilliant execution can be worth $10 million (1x$10Mn). Therefore, the rule of thumb is that you need to focus on the execution to move forward from the idea stage as far as possible in order to get the attention of an angel investor.

Proof of Concept (POC) vs. Prototype vs. Minimum Viable Product (MVP)

Most angel investors would like to see some kind of idea validation before they decide to invest in an early stage, pre-revenue startup. Idea validation provides a confirmation that your idea is a suitable solution to the problem you identified. This is where POC, prototype or MVP comes into play.

Proof of Concept (POC) = POC is a demonstration in principle with the aim of verifying that the idea/concept has the practical potential for real-world application.

Prototype = A prototype takes one-step further from a POC; it is an early sample, model, or release of a product built to test a concept or idea.

Minimum Viable Product (MVP) = A prototype often leads to an MVP. An MVP is essentially a fully functional and market-ready product but it only includes the core features to meet the most likely market segment.

While a startup with a convincing MVP would have a higher chance for getting an angel investment, POC or a prototype can also be used for pitching an angel. The stage, POC, prototype or MVP may have to be decided based on the costs involved as the funds required to reach these stages would often have to be borne with the founder/s’ own personal funds or funds from family and friends. However, it may not be required to have all of these types and you may opt to straightway build an MVP rather than having a POC or prototype.

Try to show some market traction

Market traction means the real-world evidence that there is a market for the proposed product or service. It is a factor that any investor would consider before investing in an early stage startup. Many angels would be interested to see quantitative evidence of market traction, for instance, no. of paying customers, no. of active users, cost of customer acquisition, etc. However, the challenge is that you need to have an MVP to show market traction. But at least, you may show your POC or prototype to selected target customers (the neediest customers) and get their feedback on the proposed product or service, which may be presented alternatively.

Build a strong team

The team strength is another crucial aspect that any investor would evaluate. Having a part-time, single founder who is “planning” to be full-time only after an investment is received would not make much sense to an investor. Presence of at least one full-time founder would be desirable, as it would show the investors that the team is serious about the venture.

Ideally, the team should have more than one members who offer the right mix of talents to make the business successful because any business would require people with management, marketing, HR, and finance skills in addition to technical skills. Another factor that could boost investor confidence is the ability to carry out the core activities of the business internally by the team members themselves. For instance, if you are developing a software product, it is more convincing to have the developers within the team rather than outsourcing the entire development.

Have a convincing business plan with a pitch deck

You need to have a carefully crafted business plan along with a pitch deck with all the information necessary for an angel to make an initial decision whether to proceed with the startup or not. Generally, it is the pitch deck that most angels would first request to see if they are to proceed with further evaluation/due diligence. If the pitch deck catches the attention of an angel, then he/she may want to read a full business plan.

Most professional investors are flooded with pitch decks on a daily basis from various startup founders. Therefore, make sure your pitch deck is not too long and ideally, has less than 15 slides. A typical pitch deck would have following slides:

● Problem/market gap

● Solution

● Business model

● Go-to-market strategy

● Traction

● Use cases

● Team

● Competition

● Roadmap

● Risks/Challenges

● Fund requirement

● Financial summary

While the pitch deck should not ideally be lengthy, the business plan can be as detailed as required. Make sure you correctly present:

● Size of the Total Available Market (TAM) and the sizes of initial target market segments

● Key competitors and their strengths and weaknesses compared to your position

● Potential risks and ways of their mitigation

● Fund requirement and planned use of funds

● Realistic financial forecasts and the valuation

Finally, yet importantly, make sure you approach as many angel investors as possible because you are likely to get rejected more often than not. Therefore, the more investors you pitch, the higher the chances of getting the interest of an angel investor.