How Do Angel Investors Spot That Next Big Opportunity?
Angel investors are often the funding stepping-stone that a startup needs to grow its business. These early-stage investors are usually serial and/or successful entrepreneurs or successful business professionals who fill the funding gap between initial financing provided by family and friends and venture capitalists.
An angel investor is usually looking to invest in ventures that appeal to them but ones that also offer the potential for a higher rate of return than would be expected from more traditional investments. While certainly not set in stone, an angel investor typically looks at annual returns of between 33% to 100% on their investment.
This leads to the question…
How Do Angel Investors Spot That Next Big Opportunity?
Before committing to investing in a startup angel investors will review several key areas related to the startup concerned. They will also conduct due diligence.
Because no two investment opportunities are the same this means that a startup that appeals to one angel investor may not interest others and vice-versa. With these differences of opinion and individual preferences, it is clear that the investment selection process will differ and involve different criteria.
However, some major factors influence an angel investor's decision when it comes to spotting that next big opportunity. With that in mind, we will shortly get into 7 things that the vast majority of angel investors will take into account before deciding whether or not a particular startup is worth investing in.
But, before that, let’s have a look at 3 general categories that angel investors fall into as this will affect how they will decide if that next big opportunity is suitable for them to invest in:
A Good Reason to Invest
The 3 general categories that investors fall into are:
- Economic or entrepreneurial - This type of angel tends to invest in a larger number of startups and to take more active roles in those they do invest in.
- Hedonistic - These angel investors are more attracted by the excitement that comes from helping to create something new, disruptive, or fun to be involved with.
- Altruistic - An altruistic angel is more likely to be concerned with helping a cause or community they have a passion for.
Right across the angel investor spectrum, one thing is clear. They all look for the thrill, challenge, and sense of achievement that comes with the development of a new business.
The top 7 Factors That Angel Investors Focus on
Spotting that next big opportunity is no easy task. However, here are 7 well-established factors that the majority of angel investors will take into account before committing to funding:
The Founder and Management Team
Angel investors often class the management team behind a startup as more important than the idea, service, or product a startup has to offer. This means they will look closely to understand what skillsets, experience, drive, and temperament the founder and management team have to successfully grow the business.
When assessing the founder and management team, angel investors will consider such things as:
- Will the founder and team be enjoyable to work with?
- After initial discussions, how confident is the angel in the team’s abilities?
- What experience does the startup's CEO have and are they willing to listen?
- How trustworthy do they feel the CEO is?
- Is the founder/startup team receptive to involving the investor during early-stage growth?
The angel investor will be looking for commitment and belief from the management team to a common, agreed goal. However, they will also be considering how smooth the interaction is among the members. The reason for this is that they are looking for a cohesive team, one that is ready to work individually as well as collectively to bring long-term success.
What is the Business Potential and Projected Return?
An angel investor will be looking for businesses that have scalability as well as indicators for healthy growth. They will seek clear explanations on how and why the business in question has the potential to be successful.
This means they will be looking at the bigger picture. They will want to understand future plans that relate to the addressable market sector and the percentages of that market they expect to capture over time.
Before any funding commitment is pledged an angel investor must believe that the business has a clear value proposition. Considerations relating to this include:
- The TAM (Total Addressable Market) is sufficiently large and shows positive signs of growth.
- The solution offered is one that is unique in relation to the sector being targeted.
- The time to ‘build’ and offer the solution, service, or product is now.
- That the founder and team are capable of building the business in a healthy way.
- That the profit margins and returns over the investment period are substantial enough to make the funding given worthwhile.
Concerning the last point above, an established formula in the angel investment world is the 7-to-1 rule:
A 7x (after-tax) $ return for every $ of capital invested within a 7-year period.
The Startup is Structured for Investment
Some angel investors are ready to put direct loans into a startup business. However, it is estimated that over 50% of them are looking for a minority equity ownership position in the company before they will commit to funding.
If that is the case, those angel investors will be looking at two angles. First, the startup in question is structured to allow for equity investment, second, the startup owners are prepared to give up a percentage of control in exchange for the investment given.
It also follows that the vast majority of angel investors will expect a formal shareholder agreement. One that lays out details of their contingencies relating to the investment.
What Makes the Service or Product Stand out?
By their very nature, angel investors are not afraid to put funding into high-risk ventures. However, they need to believe the opportunity is an excellent one. A lot of that will depend on how a startup can demonstrate just how unique its idea is.
In that respect, startups who have an MVP (Minimum Viable Product) to show have a greater chance of attracting angel investment interest. However, those startups that are not at the MVP stage can still be considered for investment. To achieve that they will need to present a structured, viable framework of what the MVP will look like once funding is given to build it.
Angel investors are looking for a unique way that the startup solution solves a problem. They will want to understand why early adopters or the focused target market will care about it and whether what is being offered is a real game-changer.
In short; angels need to clearly understand what key attributes make the startup stand out from the crowd.
Positive Early Momentum is a Noticeable Plus
Angel investors look closely at early signs of the traction already gained as well as what the customer base is. From a startup’s point of view, if they have achieved early traction this is likely to help them secure better investor terms. Answers to questions an investor will want relating to traction include:
- What are the major reasons behind this traction?
- How can the early momentum be accelerated?
- What scaling in this traction can be achieved?
Many Angel Investors Will Want Active Involvement
This point was touched on earlier in the piece but here is further detail. When looking at startups that offer promise and perhaps the next big opportunity, many angel investors will want to be actively involved. This active contribution comes in various forms and three common ways for angel investors to be involved are:
- Acting as a mentor to the founder and/or the startups senior management team.
- Taking a place on the board of directors.
- Taking an active management role in the company.
It is clear that many angel investors will want to assist the company concerned by adding insight as well as guidance through their business experience. However, this is not the only reason for wanting to be involved because they see this additional commitment as a way to help increase the startup's success and ensure a return on their investment.
Also, It is often the case that angel investors want involvement in order to gain new knowledge and add to their business expertise as well as increase their connections with other professionals in the business sectors they are supporting.
All of those attributes can significantly increase their chances of finding that next, next big opportunity!
Is There a Viable Exit Strategy?
Angel investors will need to see a variety of exit strategies for any opportunity they are considering. The reason for this is the exit strategies provided will help them to mitigate their risk and allow them to forecast how their returns will be paid.
It has already been stated that angel investing is a high-risk arena. While no amount of investment in a startup can guarantee returns, seeing exit strategy options that appeal to them does provide some security.
That is because these strategies will inform them of projected return amounts, when these returns can be expected, and just as importantly, how they can minimize any losses.
One Focused way for Angel Investors to Widen Their Net
Angel investment is all about selecting the right opportunity to seize that next big opportunity.
The highly experienced team of professionals at WOWS Global is perfectly placed to help angel investors do exactly that.
WOWS has developed a state-of-the-art, online private market ecosystem that is centered around technology and data platforms. This makes securing private investments that are right for angel investors very straightforward, transparent, and frictionless
With this and our access to exclusive investment opportunities that match like-minded investors with the types of startups they are interested in, it gives WOWS the ability to offer investment opportunities that are right for you.
To further this assistance we have launched our WOWS Invest Program. This invite-only service offers investment opportunities in private companies that are exclusive to verified investors. It gives priority access to private equity, curated secondary deals, and that all-important, detailed due diligence process.
If you are an individual angel investor or part of an angel group looking for attractive private investment opportunities then please do not hesitate to reach out to WOWS for an initial, no-obligation discussion on: