It seems as if a new startup is funded every day, but in reality a very small percentage of startups are able to successfully raise capital. To give some perspective, the Impact Angel Group reviewed 522 angel investments last year and only invested in five. Of those 517 deals that we didn’t invest in, we declined 513 because we didn’t think they were viable investments and only four because of timing and other circumstances. So what kinds of companies are angels actually investing in?
Every angel is an exception to the rule, so it’s impossible to really determine which companies will and won’t raise capital. However, I can share what types of companies the Impact Angel Group would invest in and the patterns I’ve seen from my experience as a full-time angel investor for the past two years, as well as conversations with over 400 angels.
Slam Dunk Capital Raisers:
If a startup has all of the following qualities, I can almost guarantee they will find angel investors:
1) Experienced leadership – A CEO with previous successful exits and/or a proven ability to take a similar product to market or acquisition
2) A HUGE market – an addressable market at least 200 million, but over a billion is ideal (note: If the company needs to raise VC money in the future, the market should be at least 500 million)
3) A valuable technology – a patented technology and/or a technology that would cost a significant amount of money or time to replicate
4) Proof that someone will actually buy the product or technology – Significant sales or license revenue traction (The company is earning revenue and/or letters of intent or sales/licensing contracts are in place.)
5) A quick and clear path to market – a lack of major go-to-market hurdles (i.e.: FDA approval)
6) A quick and clear path to exit – Identification of likely acquirers who have made similar acquisitions in the recent past and/or limited barriers to profitability in the near future
7) The ability for investors to realize a 5 – 10X return on their investment – a valuation that will allow for a 5 – 10X return on investment. Compelling information indicating that acquirers will purchase for 5-10x the valuation or the company will be able to buy back the shares at a 5 -10x multiple. (Note: I haven’t looked at too many angel deals that plan to exit via IPO, so I can’t speak to that.)
Times When Angels Might Make an Exception:
Unfortunately, there are very few early stage investment opportunities that meet all seven of these criteria. The Impact Angel Group tries to exclusively invest in companies that meet these seven criteria, but we (and most angels we know) might make exceptions in each of these areas under the following circumstances. (Again, every angel is an exception to the rule, but for the purpose of this article, we are defining “angels” as the Impact Angel Group and most of the angels we know):
1) A lack of experienced leadership – If the company has the 2-7 criteria and the existing team is truly open to a leadership change, angels might consider investing. If the new leaders are identified and have already agreed to come on board, that makes it even more interesting.
2) A less than HUGE market – If the entrepreneur can either pivot to capture a larger market or if there is a low valuation and a small amount of capital required, angels might make an exception.
3) A replicable technology – If the company has significant sales traction in the market and a strong brand value, then angels might make an exception. The key thing to understand is how much time and money it would take the competition to do the same thing and whether the competition would be willing to purchase or partner with an outside company.
4) No proof that someone will actually buy the product or technology – Many angels invest in pre-revenue companies, but the Impact Angel Group at least tries to get some qualitative data to back up the entrepreneurs’ assumptions. If angels can talk to potential customers and industry experts to validate that the target market will actually understand the value proposition, they might make an exception.
5) A slow and painful path to market – Angels might consider opportunities with regulatory and other go-to-market barriers if the potential payout is HUGE and if 1) the entrepreneurs understand and have experience overcoming these barriers or 2) the investors have some experience that they can leverage.
6) No exit in site – If the structure of the investment supports an unlikely exit, angels might make an exception. I recently considered an opportunity to invest in a business that had no intention to be acquired, but they were already profitable and were offering a revenue share opportunity in exchange for growth capital to scale and meet existing demand.
7) A less than 5 – 10X return on investment – If the time to exit is shorter or the non-financial impact of the deal is greater, angels might make an exception. However, I can say from experience that the deals offering a high social impact, but a low financial return are becoming less appealing to many investors. There are an increasing number of investment opportunities that offer the possibility to achieve a significant social impact as well as a 5-10X financial return, so the competition is getting steeper.
There are always exceptions and no two entrepreneurs or angels are alike. However, the closer the deal is to the ideal scenario, the more likely investors and entrepreneurs will succeed.
What do you think? Is it possible to invest only in companies that meet these seven criteria? When are you willing to make an exception?