Here's how you know your startup is ready for an investor.
If you have a startup and are looking for money to grow, you might be on the hunt for an angel investor.
These investors, sometimes called informal or seed investors, often support businesses in their early stages, backing unproven but promising companies with the investor's own money. They are likely to provide mentorship and advice along with funding for startup founders.
But just because these relationships are more personal does not mean they are casual. Angel investors are careful about where they invest their money because of the potential for it to be lost if a company never takes off.
Many in the Business.com community are asking if their startup is ready for an angel investor. We at Business.com investigated to find the definitive answer. If you want to attract angel funding, your startup needs to have these six things.
1. A disruptive innovation
Brian Cairns, CEO at ProStrategix Consulting, developed two iterations of his health startup, Phytology Labs, before he approached investors. The reason? He knew that the idea needed to be more of a disruption to the current market to successfully attract outside interest.
"Although our first prototype was effective … I knew we needed to be differentiated at the benefit level," said Cairns. "We [needed] to have something meaningful that no one else could claim."
If your idea is too similar to other products or services that are already on the market, or if you're not disrupting an existing industry model, you might not be ready to approach angel investors.
2. Shared risk
Zach Hendrix, the co-founder of lawn care startup GreenPal, knew his company wouldn't be ready for investors until he was taking on an equal level of risk. "I never felt like I could confidently spend their money like I was spending my own," said Hendrix. "I think it was this honest and earnest approach the made raising angel funding a snap for us."
Sharing the risk and investing in your own company increases your motivation to succeed, which makes investors feel more secure. "When a CEO [or] founder is at personal risk, and their success is directly tied to the success of their company, they are more apt to persist, to innovate and to adopt a run-through-brick-walls mentality," said Jeremy Halpern, a partner at Nutter and an angel investor for many startups in the food and beverage industry.
By investing your own resources in your startup, you demonstrate to investors that you believe in both your product and your own ability, both of which are key to gaining their trust.
3. A business that can scale
A business can be promising but still never attract investors if it can't expand to other markets. To create a startup that's ready for seed investment, make sure you have designed a business that can scale up.
For Bobbie Carlton, the CEO and founder of Innovation Women, the online public speakers’ bureau was not her first successful business. "I had founded and bootstrapped two other companies before I started Innovation Women," said Carlton. "They are good companies but are not designed to scale."
Innovation Women, by contrast, attracted outside attention partly because it had so much room for growth. Carlton’s angel investor, Pradeep Aradhya, said that he was interested in an innovative business that was "extensible and diversifiable to large future market."
Innovation Women fit that criteria by having the potential to expand on an international scale.
4. A realistic business plan
Before you seek out investors, you need a business plan based in reality and numbers that show your startup's value.
"You can tell if a startup is not ready for investors if its plans are not based in data or market realities ... or [the business] lacks clear financial projections and plan," said Halpern.
Your business plan should go beyond predictions for your business. You need to demonstrate an understanding of your industry and the market that you will be working in if you want to show your potential for growth and appeal to investors.
5. Signs of success
While a startup does not always need to have reached the stage of profitability to attract seed investors, you do need to show that you are likely to become profitable. This means achieving some success in your market without outside funding.
Mark Kahn, a venture capital attorney at PAG Law who has worked with entrepreneurs and investors at all funding stages, has watched many startups grow. He has found that the most successful ones have some in-market proof of concept before they approach investors.
"Ideas are a dime a dozen, but what investors want to see is … ability to execute," said Kahn. "That means showing them, at a bare minimum, an ability to execute on your idea to clearly demonstrate some form of early market demand without significant funding."
Cairns agreed, saying that unsubstantiated claims are a sure sign that a startup is not yet ready for outside investment. "Angels don't expect 100 percent validation, but you need to come with some credible proof that the concept works," he said.
6. A strong team of founders
While an innovative idea and a strong business model are essential for startup success, on their own they won't attract investors. "Investors invest in people, not ideas," said Carlton.
Because angel funding comes so early in a startup's life, investors need to believe in the people behind the business as much as they believe in the business itself. To convince investors to take a risk on you, you must demonstrate that your team has the experience, passion and commitment to propel your business to success.
"I like working with founders who are subject matter experts and who are most likely to accelerate their company's growth," said Halpern. "Other key traits in a founding team are honesty, clear communication, maniacal diligence and the right blend of irrational exuberance with not buying their own hype."
How to find the right angel investors
Once you feel ready to seek out angel investors, it's important not to rush things. Take time to develop a solid pitch before approaching investors so you stand out for the right reasons.
"As trite as it sounds, startups that have done their homework and know their pitch backwards and forwards stand out to me the most," said Halpern. "These CEOs [and] founders understand their business, the market and are able to sell the investment opportunity."
While you're pitching, don't make it all about yourself. Instead, Halpern advised, focus on the relationship you want to develop with your angel investor. "An often overlooked part of the process is building a trust-based relationship with the investor during this wooing phase," Halpern said. "In fact, it is important to build such a relationship and to establish goal alignment, before getting to any sort of deal making."
Carlton agreed, adding that when it comes to angel funding, it's not enough just to find someone willing to invest. "I don't think we were really ready until we connected with the right [person]," she said, adding that Aradhya was an ideal investor because he believed so strongly in the mission of her startup.
"I didn't want to spend all my time shopping around for funding. I'd rather spend my time looking for customers and partners," said Carlton. "Once I found a simpatico source of funding and, more importantly, advice and guidance, I focused there."