Angel Investors’ Investment Criteria | The Gold Standard

Entrepreneurs and angel investors often ask me: What kinds of companies do angel investors invest in?

Because angel investors are individuals and all individuals are different, it’s really hard to answer this question. However, from our experience reviewing over 1000 angel investment opportunities and meeting with nearly 500 angel investors, we can say that there is a list of criteria that most investors strive to meet. This doesn’t mean that angels won’t invest in companies that don’t meet all of these criteria, and many investors require additional criteria (i.e.: impact). Rather, this is simply a gold standard that most investors strive for.

Note: For those of you who have been following us for a while, this is a new and improved version of the criteria we came up with about a year ago. 

The Angel Investor Deal Gold Standard:

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 of 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)      Valuable Intellectual Property – intellectual property that is protected by patents or trade secrets, or would take the competition a significant amount of time to replicate

4)      Proof that someone will actually buy the product or technology – meaningful sales (we would say $300k or more) or 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 the company for 5-10x the valuation or the company will be able to buy back the shares at a 5 -10x multiple. (note: we haven’t looked at too many angel deals that plan to exit via IPO, so we can’t speak to that.)

And here are a couple points that we’ve added to our previous list:

8)      A valuation of $2 million or less – Since angel investors want to make a 5x – 10x return, a pre-money valuation of $2 million or less is preferred. This of course varies depending on the industry and stage of the business. Most of the pre-revenue software deals we see are between 1 and 4 million dollars, but those under $2 million tend to get more investor interest. Additionally, we do see and have invested in pre-revenue deals with significant intellectual property, i.e. medical device deals, with valuations north of $10 million. However, medical device, biotech and other intellectual property-heavy companies with valuations south of $5 million tend to get more investor interest.

9)      Preferred Stock – There is a lot of controversy about the pros and cons of convertible debt, but most of the investors we know strongly favor preferred stock equity ownership. With equity ownership, the investors and entrepreneurs agree on a company valuation and the investors’ ownership is determined by the amount of money they invest as compared to the valuation of the business. If investors purchase preferred stock, it means that they will get the money they invested back before other designated investors and creditors.

That’s our best shot at outlining the criteria most angels strive for. Does this mean that angel investors won’t invest in companies that don’t meet this criteria? No, but from our experience, we can say that companies that meet this criteria (or at least come close) will have a much easier time raising money.

Of course, there are exceptions to every rule! Stay tuned for a list of common reasons why investors make exceptions…….

And in the meantime, tell us what you think!

 

This entry was posted in Angel Investing Strategy. Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *

Please prove that you\'re not a robot *