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Angel investors are indeed lifesavers for smaller startups—by investing a large amount of money into their causes in exchange for a small percentage of equity. Through angel investors, businesses are able to obtain substantial funding to start and eventually grow their respective businesses.
However, smaller businesses should definitely give angel investors a reason to consider their startups, as they can’t go around just coming and pointing at them, hoping they’d choose their startups. After all, why would an investor ever give large amounts of money to a certain individual for no appropriate reason? Who on earth does that?
Here is how to get these elusive creatures. So, what are we waiting for, Let's dig in!
Before we go into specifics, let us look into a few reasons as to why angel investors invest at smaller startups in the first place.
These investors are categorized based on the amount of money they are able to place on a certain investment, and are divided into three:
There are also a few key takeaways one has to know regarding these investors.
Select which angel to target:
Assess for what their value add is
Find what stage they invest in
Investors are mimetic creatures—momentum and hype are EVERYTHING in a fundraising process. Here are a few things you should do to catch them:
Referring them to content recently published about you or a big achievement or notable mention from an authority they trust is also very helpful.
Investors, through connections, are greatly interconnected with each other. Reeling in one investor and impressing them might result in a domino effect of multiple investors banging on your door.
However, how do you get angels to invest money? There are some techniques to help catch the attention of angel investors.
I would put a deadline on your raise so that people have a sense of urgency. For example: “Let me know before Friday 3pm”
Luigi is a Founders Cafe member who went from 0 to $1.4m raised and got into YC.
Be sure to offer deals that will put your investors in a starry-eyed, money-induced haze that they would actually invest money in your start-up.
Practice pitching ideas, especially with friends or those so-called broke angels. That way you’d emerge as a seasoned veteran in terms of luring in angel investors.
Yash is a partner at a VC in Founders Cafe who writes pre-seed checks from $100k-1M.
Lastly, it is also important to know what angels look for. These are some important characteristics they seek when looking for startups to invest on.
Scale (market, idea, defensibility)
Angel investors look for a founder and a team. It gives your business 100x more potential when you’re able to choose your business model wisely. Value capture can’t be ignored, as it bottoms-up market sizing!
Thinking about traction
Traction has a big role for first time founders. While multi-founders can easily raise on ideas, first-time founders likely need traction in order to raise. With that, there are different purposes of traction which are execution risk and adoption risk.
It is important to know that the type of company tells you about the level of traction—consumer companies usually require more traction than enterprise companies. However, you would rather want no traction than bad traction, as this leads to a negative image, therefore leading to less audience.
In a market, there are different types of problems diagnosed. Popular markets have over $1B in value; growing ones have about 20% growth every year. There are also urgent markets, ones that are too expensive to solve, which are at about a billion dollars, mandatory ones with its new laws, and frequent ones that come up over and over. Know who your customers are, and how easy they are to find.
All investments must independently be able to return the entire fund, 80 to 100 times more.
The market has dynamics—having segmentation, size and commoditization; the battle between the market and a founder goes in such a way like this, where the market seems to usually have the upper hand:
Good teams should find and tell you how good the market is. Founders might start by going after a small market before expanding, since there is a fierce, incumbent competition in larger ones.
The product itself is also very important. Chamath Palihapitiya, venture capitalist, says that: A great product with average people is better than an average product with great people. A great product is actually the best signal of great people and ego suspension.
Here are key elements of a great product:
Know that a good idea means a bird’s eye view of the idea maze, understanding all the permutations of the idea and the branching of the decision tree, and gaming things out to the end of each scenario.
Know that if a startup isn't sending you monthly insights, it is going out of business. Good ideas initially seem like bad ideas; startup investing violates our intuitions.
Facebook initially seemed like the perfect bad idea: a site (1) for a niche market (2) with no money (3) to do something that didn't matter. "It will rot your brain" are the most valuable words in investing.
Liquidity aligns incentives; otherwise, investors want founders to not sell to, so they can get the last double.
In the eyes of an investor, there will be four core questions:
How do you get customers? How is the supply side versus the demand side?
You can consider the win-rate on demo to sale. This is underrated but important for sales-led models.
The battle between a startup and an incumbent is whether the startup can get distribution before the incumbent can get innovation which, normally in financial services, distribution is so much more important.
There is something called a pull market that gives an early indication of a blue ocean opportunity. You may ask yourself, what has changed in the last quarters or years to justify that now is the right time? You need to come up with a good reason why you will be successful where the others failed or chose to opt-out.
There also exists different things in the monopoly that catches value:
When considering a company’s strategic position, you need to consider:
An example would be how Amazon is a threat to Google’s core search business since a significant portion of Google’s revenue comes from search queries for things that can be bought on Amazon.
It is low for SME/mid-market and has a high-cost base to provide onboarding/integration and customer success. This would need a 6-7 figure enterprise contracts for this, with large companies so that they can receive commensurate ROI on spend — where a company typically needs $500M+ in annual revenue.
Know whether its service is barely scalable, software is very scalable, hardware is somewhere in between, or with plateau effects.
SEA and emailing are potentially infinitely usable, while buzz and performance marketing are not.
If you can deliver your offer anywhere in the world, regardless of regulation, language, culture, distance or local partnerships, then you are very, very lucky!
Uber is a good example of workforce scalability, as they “outsource” drivers. Youtube is even better: they outsource the content production to their users, and for free.
Preventing graduation risk typically follows the playbook below:
Another important detail you shouldn’t miss is that you should be prepared for some EXPLOSIVE screening questions before they invest in you. They might ask questions such as what your industry focus is, so being confident and ready with your own knowledge about your startup is a must. If you can’t answer with actions, you probably shouldn’t be looking for investors in the first place. They would also do background checks on you, so beware of the skeletons that may be hidden inside your closets.
And that’s it! That concludes my talk about angel investors as a whole. I hope this helps you attract more angels for your startup!
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