Business angels are not charities and demand a return on their investments. Startup investors know their ability to help depends on the project’s success. So it would be best if you addressed each investment with diligence and a goal of a decent return.
Due diligence refers to researching a company or person before investing money in them at the startup stage. Many people skip this phase because of the small amounts of money at stake.
Increases in the amount of the investment usually mean due diligence also widens. Angel investors will be doing expensive background checks for criminal records and lawsuits.
A background check may be empty, though, if this is the first time the founders misused funds. We’ve seen it with mega-frauds like Enron and Bernie Madoff and the stunning fall of Theranos.
Thus, what characteristics should a startup have to make it a worthy investment?
Attractive Market Opportunities
Angel investors aren’t concerned with how big a market is. Valuation and ease of exit are the two most important factors to consider.
But attractive market opportunities are the foundation of any fundable business case. And you can find it in any number of industries and marketplaces.
Understood Markets
When a startup solves an existing problem in an understood market, it might make a worthy investment. The company might be releasing an improved version of a current product or improving the way of delivering that product to clients.
Untapped Markets
When we talk about new markets, we’re talking about products, services, and technology providing new benefits to end users.
According to the Blue Ocean Strategy, companies should seek out untapped areas to build demand and experience rapid expansion.
Untapped markets are a hallmark of innovation. Common in understood markets, incremental innovation entails adding to and improving upon existing products.
Disruptive innovation, in contrast, lowers the price of a high-end product or service. It makes products available to a broader audience. This shift shakes up the industry by pushing out well-established players.
Industries Familiar to You
BA investors rarely have the technical expertise to assess a variety of business sectors. Yet, specialists outperform generalists in the investment market. Survival rates are higher for businesses sponsored by specialists.
Your knowledge can also help you spot promising new businesses with clear paths to profitability. Understanding the possibilities and the requirements for a successful investment is much easier.
Assessing the Business Plan
Investors often use the business plan as the standard instrument for initial deal screening and final deal evaluation.
Use the business plan to look for the following:
● Projects with more quantifiable outcomes
● Projects that identify the problem
● Projects that provide a viable solution
● Projects with the potential for a higher return on investment
● Projects you can fund using the available resources
Investment Management
After investing, an angel investor faces some challenges.
Angel investors only get paid if the startup succeeds. It’s normal for them to want any of the following:
● An advising role
● A say in important decisions
● Some protection from a founder doing anything that could hurt the company
Angel investors can secure their investments in three ways. Board seats, information rights, and founder restrictions are theirs.
Significant investments may need board seats and committee approval for vital operational procedures. The company must communicate financial and business data if the investor still needs a board position.
Investors may need key founder-related clauses to mitigate the risks of relying on a few key founders to succeed. The founder vesting clause allows the organization to buy back some founder shares.
Investors often demand non-compete agreements from founders. They can prohibit departing founders from using the company’s classified data or hiring away personnel for some time.
Cybersecurity best practices can also help angel investors protect their investments. For example, password managers allowing you to store business-related account passwords can reduce the risk of data theft or breaches for a startup growing into a small business.
Also, as an angel investor, you’ll be storing documents, including the following:
● Product development
● Actual and planned production
● Balance sheets and income statements
● Prospects and potential sales
● Debtors and creditor reports
● Sales funnel or pipeline
● Tenders and contracts
Hackers seek these documents for many reasons. Using secure cloud storage can help to store them properly.
Finding a startup that fulfills all criteria you set in the deal screening may be challenging. In all likelihood, you won’t find a company pursuing funding that knows these requirements.
The startup must validate its business plan and show it can develop revenue and profit. But it’s your job to ensure your investment is safe and secure.