If you’re trying to secure funding for a startup, it helps to have an idea what investors are looking for. So we asked
managing director of
Alliance of Angels(@allianceangels) – the largest angel investor group in the Pacific Northwest.
Alliance of Angels invests more than $10 million into 20-plus companies each year. If you’re headquartered in Washington, Oregon, Idaho, Montana, Alaska, or British Columbia and you have an amazing business idea, the team might be willing to hear your pitch.
Below, Ngo shares how the group considers startups for investment and why you might not be ready to go after investors. The transcript has been lightly edited for length and clarity.
What sort of details do you look for during a business pitch?
We pay most attention to (a) the team and (b) the size of the market opportunity they are going after.
What makes a good startup team?
First, there are many subjective factors: passion, tenacity, willingness to listen, coachability, etc., that are best demonstrated by specific things the entrepreneur has done and / or accomplished in the past. For example, a story like: arrived as a penniless immigrant, worked her way through school, built a series of increasingly successful companies after graduating, etc., is pretty compelling.
Next, there are some objective factors we pay attention to:
- Prior startup experience (especially as a founder) is a big plus.
- A team of 2 to 3 individuals are usually better than a single founder.
- Relevant domain experience, and particularly so in “deep knowledge” sectors like life sciences, machine learning, etc.
What about the size of the market opportunity?
The company needs to be going after an addressable market opportunity that is at least $100 million in size.
Most of the time, angels make money when our companies are acquired (initial public offerings, or IPOs, are extremely rare). In general, it’s difficult to sell a company that does less than $10 million in revenue. Of course, you can point to many exceptions, but this is what broad data sets on corporate acquisitions will reveal.
A reasonable market share for an entrepreneur to achieve is about 10 percent; any more than that and you’re expecting them to part the seas.
What red flags may signal a business isn’t ready, or isn’t right, for investor funding?
A business isn’t ready for investor funding if...
- Their company hasn’t been incorporated.
- All founders are still working at their existing employer. This may demonstrate a lack of commitment.
- Basic investor materials have not been prepared. These can vary, but at the minimum, a business needs a one-pager that describes the business and a spreadsheet that describes who owns the company – often called a “cap table” or “stock book.”
A business isn’t right for investor funding if it doesn’t have the potential to grow and scale quickly and exponentially (i.e., “the next Uber”) – most angels and early stage investors are looking for companies that have these qualities. If a business does not have this property, it’s unlikely to be a fit.
A common example of businesses that are a poor fit for angels and early stage investors are those created primarily to generate cash flow for the founders, sometimes referred to as “lifestyle” or “hobbyist” businesses. While there can be exceptions, these typically include restaurants, vineyards, and most services-based businesses, such as PR agencies or consulting practices, which scale linearly as revenue growth is contingent on adding employees.
For more reading on VCs and angel investors, check out “Angel Investors vs. Venture Capitalists: A Primer for Tech Businesses.”)