Are you thinking about seeking angel investment for your small business or startup? The first step should always be looking at whether or not your business is a good candidate. Many really good businesses are not attractive to angel investors. It’s not as simple as growth or profits.
The truth is that the vast majority of potentially successful small businesses and startups are not going to get angel investment no matter how good their pitch or plan. Simply having a good business that can grow and prosper isn’t enough.
So what is? How do you catch an angel’s eye?
Here are five questions that will help you figure out whether your business is likely to be interesting to angel investors.
1. Does your business have major growth potential?
Angel investors look for businesses that can increase sales tenfold or more over the next three years. They don’t want to share in your profits; they want your company to go public or sell to a larger company. It’s how they make their money.
That takes major growth. So you need a big market. That means not just numbers in spreadsheets, but a market that the investors themselves will believe in. Angel investors want businesses that solve real problems for lots of people.
2. Is your company scalable?
Scalable means the business can sustain major growth without the need for too many more services or employees. Can you easily handle growth without losing quality? Does it take doubling headcount to double sales? This might hamper the bottom line.
Be sure to keep the future in mind. Angel investors like product businesses, or productized services, not service businesses. They want businesses that can increase sales overnight without increasing fixed costs.
A classic example of productized services is Intuit’s Quickbooks, which decades ago replaced bookkeeping services with software. Bookkeeping is a service that requires more hours or work in direct proportion to sales revenue; software scales up because it can be used by many people at the same time, without requiring personal attention. More recently, Moz took a search engine optimization consulting business and built from that to a software-as-a-service (SaaS) platform. The search engine consulting was people intensive, but the SaaS platform scales.
3. Is your business defensible?
Angel investors want businesses that can’t be easily duplicated by competitors. They look for something proprietary, like trade secrets, copyright, trademarks, and patents.
Even specific market knowledge can be important. First-mover advantage helps, but it is rarely enough on its own. You have to be able to maintain the advantage into the future. Is there a secret sauce? Are there barriers to entry? All this makes a business defensible.
4. Does your team have management and startup experience?
Risk is always a big concern with startups, especially for investors. In fact, if you haven’t been involved in a startup or had some form of management experience, it could be close to impossible to find someone to take a chance on you. When you have people on board with startup and management experience, you are creating a team of strong leaders likely to build a healthy, marketable company.
Don’t hesitate to reveal a failed attempt at a startup because it demonstrates that you have experience and perhaps have gained some important insight.
It’s frustrating for first-timers in startups that they need investment to get experience, but they can’t get experience without investment—it’s sad but true. Angel investors are extremely wary of people without actual startup experience.
5. Do you have a believable exit strategy?
Angel investors may be willing to help you start your business, but what they get for their money is a share in your company. The only way they make money with that is when they can sell that share of ownership for money; which is what they call the exit. They don’t want to invest in the ordinary healthy company that pays its founders and grows but never sells out. You’ll need a good exit strategy.
Don’t kid yourself: If you can’t answer “yes” to these five essential questions, you should not waste your time thinking about angel investment.
If your business doesn’t have what angel investors want, that doesn’t mean it isn’t a good business. It just means you need to change your funding strategy. Look to friends and family investors instead of angels, or commercial business lending, or scale your plan down so you need less startup funding.
Here’s some good follow-up reading:
This article is part of our Business Funding Guide: Fund your business today, with Bplans.
Editor’s note: This article originally published in 2014. It was updated in 2019.