What do angel investors look for in startups?

Angel investors will tear your idea apart if you haven't got a solid business plan.

You have a great idea and a perfect plan to start a business in Australia, but there is one major obstacle that stands in the way: money, or more precisely, a lack thereof. So when it comes to actually getting to market, often you'll need some help – you need to be funded.

You can look to the banks, or even look at crowd-funding schemes, but often a startup needs more support. Getting to market is often more complicated than just having the funds to do so, thus, an effective way to obtain both money and mentorship is through angel investors.

Angel investors are looking for "blockbusters" that deliver high returns, fast.

Angel investment in Australia

In 2006, the Department of Industry, Tourism and Resources (DITR) looked into the angel market in Australia. The report asserted that such investors can offer unique benefits to investees because of their direct entrepreneurial experience and knowledge. With such wisdom comes a unique ability to both understand, accept, and most importantly, assess risk.

They typically make one or two investments a year at a rough average of $350,000, but according to the report they are looking for "blockbusters". They want to invest in more than just a successful and sustainable business, they want high returns, fast. Based on the DITR survey, angels were "characteristically ruthless in their approach to culling proposals," many receiving upwards of 30 proposals a year. However, a vast majority properly consider less than 10 per cent of the opportunities they receive. So what is it that they look for?

A good idea, but a great team

DITR found that 67 per cent say the management team is the most critical factor in making their assessment. However, assessing the capacity of the managers often comes down to a combination of attitude, expertise, and preparation.

Enterpreneur resource and advice site BPlans spoke to several angel investors about what turns them on and off when they are being asked for big bucks. One of the most common mistakes is that entrepreneurs often seek investment with a combination of arrogance and ignorance, but this limits their persuasiveness extensively. Instead, they need to be confident but very calculated.

Angel investors are notoriously picky, but they can provide priceless and ongoing advice.Angel investors are notoriously picky, but they can provide priceless and ongoing advice.

Kim Garreton from Edina said he can't stand it when entrepreneurs claim that they are the only ones doing what they do. This suggests they haven't done their research, and therefore their other claims cannot be trusted.

Similarly, Jessiva Magoch from Philadelphia stated that such pragmatism applies even more so to financial and market forecasts.

"I'm impressed when entrepreneurs know their numbers inside and out and are realistic about their valuations," she said.

Dan Fugardi from Beverly Hills captured this notion best, mentioning his top priorities are integrity and transparency.

"I love to hear brutal honesty no matter what," he said.

Angels are experienced people who can easily tell when the truth is being stretched.

Persuasively presenting your business

The hard part about valuing a startup is that you're forced to base a lot of numbers on predictions. There is no guarantee you can deliver what you promise – and investors know this. But remember Angels are looking for high-growth, high-return startups. They are prepared to take on some risk, as long as you can prove that you and your team have what it takes.

These are experienced people who can easily tell when the truth is being stretched and when aspects have not been adequately considered, so ensure that you are thorough and truthful in your representation.

Above all else, investors will be interested in how well you will spend their money. You need to prove to them this investment is worth the risk by showing that your startup can deliver competitive returns. But persuading such an informed audience often comes with a lot of complex formulas, forecast modelling and strategic planning, which can be a time-consuming and overwhelming process. However, it is essential if you hope to turn ignorance and arrogance into confidence and calculation.

If you're thinking about seeking angel investment, talk to WMC today about building a strong business plan to transform your business idea into a winning investment opportunity.

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