Startup Insights

What do Angel Investors Look for?

The Indian entrepreneurial ecosystem has evolved over the last decade. It is exponentially increasing with a number of new ventures starting at a regular basis.

The Indian entrepreneurial ecosystem has evolved over the last decade. It is exponentially increasing with a number of new ventures starting at a regular basis. Setting up a new venture is relatively easier today with the startup ecosystem seeing higher engagement. I plan to write a series of blog entries around making a venture funding ready. Raising seed/angel money remains a challenge for Entrepreneurs in terms of investor expectations, time commitment required, and understanding investor feedback.

To start with, here is a primer on what angels typically look for before investing in a venture. The weightage on each dimension may depend on the stage of the startup and the priority of the investor but this list should give the Entrepreneur a good guidance on what an investor will look for to determine the risk of investing in a venture.

1. Team: “An idea is worth almost nothing, execution is worth everything”. How the idea is brought from being just a possibility to hard reality depends on the team working on it. The people working on the venture make all the difference between a success and a failure. Investors will typically look for chemistry, expertise and entrepreneurial skill in a team. Prior experiments with entrepreneurship are always beneficial as it brings a startup mindset and the experiences to the mix. An important skill that investors look for is the team’s ability to sell/market their product or service. Technology centric teams may tend to overlook this important dimension, however even a great product/service needs to be marketed well to get the initial traction. Profile of Mentors & Advisors associated with the startup also add to investor’s confidence. We have had investors specifically mention that when they see a credible advisory board, their confidence in the venture goes up. Some even went on to mention that they almost make their decision just looking at the advisory board. 

2. Product: Next comes your idea / offering / solution / product. The investor will check the value of your product/service you are building / providing. Typical questions that investors assess here are:

  • Is your offering mature enough to find a place in the market?
  • Do you have defensible IP? Does your offering create enough entry barriers for others in the marketplace?
  • How scalable is your product – do you have to customize it for different customers or can you support a large customer base with the same offering? 

3. Market The team’s understanding of the market they are addressing with their product offering is key to investors. Market understanding will define your strategy and how you market your product.

Some key questions to ask here are:

  • Are you playing in a large enough market or is it a niche segment?
  • How do you plan to take your product to market?
  • Who is your competition and what are the alternatives like?
  • How difficult would it be for someone to enter the market and displace your market position? As a venture the Entrepreneur needs to be aware of and plan for the bigger picture. 

4. Traction: In India, especially at an angel investment level, traction plays an important role for a prospective investor. Traction could have a very different definition depending on the target market segment and the product offering. B2B and B2C products could have different parameters.

Key metrics investors look for are :

  • Number and quality of customers using your product.
  • Repeat customers and customer churn to measure adaption curve c. Validation of revenue and its growth curve 

5. Business Model: Every investor will want clarity on how the venture will build a sustainable business and make money. Key questions to keep in mind would be:

  • What are the unit economics for your business?
  • How much does it cost to acquire a customer (CAC) and what monetization does that customer bring to you over a lifetime (LTV)?
  • What kind of capital would your business require to scale? 

6. Exit Plan: The ultimate goal of an investor (apart from not-for-profit social ventures) is to get returns from the investment capital. While starting a venture, an Entrepreneur needs to have some level of clarity on how the venture can possibly provide an exit to the investor. The exit could come via subsequent rounds of funding or M&A or an IPO. Typically at an early stage, the exit path will not be clear. What an investor looks for therefore, is the Entrepreneur’s thought process on the possibilities Overall, an investor will be looking to minimize the risks in investing with the venture by checking the possibility for maximum returns. Finally, do keep in mind that the idea and the maturity of the business will make a difference, but ultimately, it is the confidence that the entrepreneur can inspire about his/her ability to carry the plans to fruition that determines whether you succeed or fail in raising funds. As an entrepreneur, covering all these details with good clarity, may well get you on your way to raise your angel / seed round. 

Tell us if you found this useful and if there are specific areas you would like us to cover in our next blog entry. This blog is the first in the series of blog entries around seed/angel funding.

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