November 16, 2019

Making Money on Their Investment, Teams That Win, and Eight Other Things Angel Investors Care About

A significant amount of my weekly schedule is meeting with startup founders to hear their investment pitch. While I have particularities in what I want to hear in a conversation with the founders, I enjoy learning from other angel investors on what they value.

The Alliance of Angels, a group of angel investors who invest in Pacific Northwest startups, held an event, "The Top 10 things That Angel Investors Care About," on Nov. 12, 2019 in Seattle, Wash. featuring Lowell Ricklefs of Traction Advising. While you can view the presentation slides here, this blog post will focus on a few points that I found useful.

I strongly agree with Mr. Ricklefs that founders should not "spend too much time in the weeds about your product." Rather, they should discuss how they will "build a business that clients will love." This is what I call the "WOW Factor." What impresses me most when I hear an investment pitch is the founding team's plans to build a business that clients or customers will love.

As indicated in the slide on the right, Mr. Ricklefs discussed how angel investors want to invest in a company that is led by a strong management team. Not only do angel investors want to support a company lead by a team that is experienced, passionate, and knowledgeable, but that want to support those founders possessing common sense, integrity, and strong leadership skills. Each one of us periodically come up with a great business idea and a few may be able to create a product. However, it takes a winning team to execute a business plan effectively.

With respect to a go-to-market strategy, Mr. Ricklefs is correct to note that "the biggest problem early stage companies have is driving scale" and "you have to establish traction then scale." He says angel investors want to know your path of driving awareness to interest to engagement to revenue.

The presentation importantly notes angel investors care about a company's pricing model. The founders must explain how they will make money. "Revenue is king (license, transactional etc.)," says Mr. Ricklefs.

I appreciated the discussion on how investor pitches should cover exit scenarios. When should investors expect to receive a return on their investment and what is the internal rate of return (IRR)? 5x IRR? 10x IRR? Mr. Ricklefs recommended that founders provide a few examples of similar companies that have produced successful exits for their investors.

The presentation's concluded with a few basic points for founders including the importance of articulating their message clearly and succinctly. "Don't make [the investor] try to decipher what you are saying," Mr. Ricklefs advises. He also recommends not spending "time pitching to investors who don’t invest in your space."

While various risks are mentioned implicitly in his presentation, I recommend founders include a slide specifically addressing the company's risk factors. A company that is unable to produce the anticipated IRR does so not because of the lack of opportunity, per se, but because of one or more of the following risks: product risk, technology risk, market risk, management risk, scale risk, capital risk, and exit risk. A discussion on the adverse impact climate change may have on a company's operations may be necessary. Founders who are aware of the risks to their venture demonstrate their focus on building a business that clients will love.

What do you think angel investors care about?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.

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