Early-stage financing: what angel investors really want

A start-up's first round of financing often determines its success or failure. Angel investors play a key role in this process: they invest in the earliest phase, when classic Venture Capitalists wait and see. However, angels not only bring capital, but also valuable experience, industry knowledge and contacts. It is therefore crucial to understand what they look for and how start-ups can win them over.

Not every startup is attractive to angel investors. They follow certain criteria in order to minimise risks and maximise opportunities for a high return. The most important factors are

1. a strong founding team

The team is often the decisive factor. Investors are looking for founders who are not only technically competent, but who also demonstrate perseverance, leadership and the ability to learn. I have already here written something!

2. a very large market

An excellent product in a tiny market is of little use. Angels favour start-ups with potential for scaling - ideally with an addressable market of several billion euros. This aspect is often underestimated, but is often an enormously important factor for follow-up financing with VCs.

3. a scalable business model

Investors want to know that the company can grow efficiently as the number of customers increases. A digital or platform-based model often has an advantage over highly labour-intensive business models. Models with recurring revenue (recurring revenues), as they increase the predictability and stability of the business. Companies with a high proportion of recurring revenues are often valued with higher multiples. In practice, this can be a 6 to 10 times the valuation of the annual turnover compared to lower multipliers for one-off sales models.

4. first traction

Very few angels finance pure ideas. Initial customers, sales or at least pilot projects and strong expressions of interest (LOIs) show that there is a real need.

5. a tidy cap table

Please no mentors, idea providers, friends, family and other accessories at the cap table (rather VSOPs). Shares should be held by the founders or by investors who make a financial contribution.

6. clear exit prospects

Angels do not invest out of charity - they want a return. They therefore look for realistic exit opportunities, for example through a sale to strategic investors or a later VC round.

7 Realistic valuation

Many start-ups overestimate their value. Angels expect a fair valuation that leaves potential for future rounds. Excessively high valuations deter investors as they make subsequent financing rounds more difficult.

Finding the right investors

Not every angel suits every startup. Some focus on specific industries or technologies. Good sources for the search are

• • Business angel networks (e.g. BAND, AngelListinvestor events)
  • LinkedIn and direct recommendations

innoWerft start-ups benefit from our network: we know many angels (and VCs) and are able to assess which angel suits which startup - from a professional and personal point of view.

A convincing pitch

Angels see a lot of pitches - so your pitch must be compact, clear and emotionally appealing. The most important content:

• • Problem and solution (Why is there a market for your product?)
  • Market size and competition
  • Team (Why are you the right ones?)
  • First successes (customers, partners, prototype)
  • Financing requirements and planned utilisation of funds

About the perfect pitch we have here written something!

Dos:

• • Clear, honest communication
  • Flexibility in valuation so as not to scare away investors
  • A term sheet with fair conditions for both sides (see also here)
  • Interest in strategic added value from angels, not just capital

Don'ts:

• • Unrealistic expectations
  • Concealment of problems or challenges
  • Too many formal hurdles for the investment process

• • Angel investors are more than just backers
  • You pay attention to team, market, scaling, traction and exit prospects
  • The right approach and a good pitch are crucial
  • Realistic valuations and clear communication promote successful deals

With these points in mind, every startup can increase its chances of successful angel funding!