What Are the Top Three Things an Angel Investor Looks For?





Today, I am starting a new column here at Small Business Trends. In addition to my regular weekly articles that focus on data-driven discussions of entrepreneurship, I am going to cover my experience as an angel investor in two new monthly columns. Below, we will focus on the top three things that angel investors look for when evaluating a potential investment in a startup company.



What Does an Angel Investor Look For?

A Business Addressing a Real Customer Problem

The first thing I look at when evaluating whether or not to invest in someone else’s startup company is whether the company is responding to serious customer pain point. Selling a new product in a new company is very difficult. But if the startup is addressing a true problem that customers have, it will stand a chance of succeeding.

For example, I recently invested in a company which produces a biosensor that allows growers of fresh produce to identify pathogens, like Listeria, in minutes, not days. Faster identification of pathogens saves both money and lives, both of which are important to growers.

A Company Offering a Dramatically Better Solution than Competitors

The second thing I look for is the company’s solution to the customer’s problem. The odds of the company’s success are much higher when the entrepreneur is offering a dramatically better solution than other alternatives.

For instance, one of my portfolio companies uses artificial intelligence to allow salespeople to develop customized openings for email messages. The company’s product allows sales people to create email messages with three times higher click through rates than templated messages. And it allows the sales people to create the message in less than half the time it takes to do it manually.

A six-fold increase in the number of “click-throughs” per minute of crafting time is a major improvement to companies undertaking email sales.

A Business Led by an Experienced Entrepreneur

The third thing I look for is startup experience. As someone who has researched and taught entrepreneurship for 25 years, I can tell you one thing for sure. Much of what it takes to be a successful company founder cannot be learned in school or working for someone else. It is learned by doing.

That is why I look for entrepreneurs who have started at least one previous business with a successful exit. The exit doesn’t have to be huge. But the act of building a company and selling it to someone else for a reasonable return on the entrepreneur’s time and the investors’ capital already puts a founder in rare company.

More importantly, that outcome indicates to me that the person knows several things that inexperienced entrepreneurs might not know. For instance, the founder of one of my portfolio companies, had three previous exits, including a company he sold in 2011. That experience was a big draw for me when I investigated financing the company.

There are many more things I will investigate before I make an investment decision — whether I like and trust the founder; whether the entrepreneur can sell; whether the team is complete; whether the company’s business model makes sense; whether the idea is scalable; whether the market is large enough ; and whether there is sustainable competitive advantage, among other things.

But if I had to list the top three things an angel investor looks for when making investments — it’s these three items identified above.

Angel Image via Shutterstock

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Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

4 Reactions

  1. Scott,

    Nice insights. I’m always interested in angel investing, and I know a thing or two about it, but I want to learn more from your very own experience: Why would you choose the angel investing path, not the VC path? One more thing: Other than the things you mentioned in the article, what makes you ‘tick’ as an angel investor? What’s your sense of achievement?

    Many thanks 🙂

    Ivan
    Founder Noobpreneur.com
    Recent startup: Funding Note ( https://www.fundingnote.com )

    • Martin Lindeskog

      Ivan: What is the smallest amount an angel investor is investing? How would you compare and contrast angel investing with equity crowdfunding?

      • Martin,

        Just saw this – sorry 🙂

        I’m not sure, but but that depends on the size of the investing round. As more investors mean more “helpful voices”, I imagine startups would want to keep the number manageable. In a $500K round, say 100 angels with each $5000 to invest would make your life miserable, IMHO.

        Angel investing vs. equity crowdfunding: Both are quite similar to me, with several main differences: 1 ) With equity crowdfunding, your business plan is exposed to the general public; 2 ) Equity crowdfunding means you deal with more investors than you need.

  2. Ivan, my family has operated a small business in the automotive industry for the last 11 months and we generate our customers from google ads and interest research marketing. This business has operated on its own cash flow without additional funds to be invested. We believe now that we are at the place where we want to expand and will be looking to the angel investor market for capital infusion. I have read your previous articles and see that you agree with our choice of angel investors over other sources of investment available today. What 3 sources of contacts would you recommend to us? We are thinking of funding over a 24-36 month period in order to keep the business successful as we expand our markets. Is that a favorable option for angel investors, in your opinion?
    We look forward to your reply and recommendations. Thank you for sharing your knowledge and experience publicly.

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