3 Things an Angel Investor Looks for in a Startup

Hint: It's not what you think.

There is a better way than learning from your mistakes. It’s learning from other people’s mistakes.

A useful side effect of my job is learning from my mistake and from the mistake of others at the same time. I am a former programmer who went to law school, nowadays I am a happy part-time lawyer and a part-time investor. Thanks to my job I came up with a surprising analysis on what drives a business angel to invest in a start up and refuse another, and this is exactly what I want to share with you today. Of course this is not confidential (we lawyers are a bit paranoid about confidentiality) but I bet that the result is very different from what you thought.

Learn from the largest equity funding in Europe and Asia.

The analysis comes straight from Bill Morrow, founder of Angels Den – the “largest equity funding facilitators in Europe and Asia”. I had a chance to have a chat with Bill during a conference, and he’s clearly a guy who doesn’t make much mistakes. He has founded and sold companies for the last 25 years, and his ‘Angels Den’ is a very successful syndicate focused in funding small enterprises and innovative projects.

So it’s interesting to see that even he himself looked a bit surprised by the result of his own analysis.

Angel investors look for return on investment … or maybe not.

What’s the most important factor to convince an Angel to invest on a project? Everybody’s first reply might be return on investment (ROI). Well, “everybody is wrong” (quoting Bill).

On a research made on more than 400 angels of the Angels Den network, return on investment was only the 3rd reason in choosing a project. The 2nd placer is “giving back to the society”. The average angel become rich in his ‘30s and very rich in his ‘40s. He spent an average of 16 years focusing on one thing – making money – and in being successful he needs a “new reason to wake up in the morning”, so he decides to help the community. “Not to mention the ego, 97% of the angel are male and egos play a big part of it” (again quoting Bill).

If you are thinking that this a bad drive, think again. Personally, I don’t care if the reason of investment is to pamper their ego, they are doing good after all.

So what is an Angel Investor really looking in a company?

So “making (more) money” is only the 3rd reason to invest in a project. And “giving back to the community” is 2nd. Then what’s the no. 1 reason?

And the winner is: “having fun!”

True. “Having fun” and new challenges is the first reason to convince an angel in investing in a project. This is why a business plan of hundreds of pages is rarely seen in my job, it’s not fun. Personally – when I teach – I suggest to my students a 4 page keynotes and a video with a personal touch.

Do you have a non-profit project to fund? Well fun is not enough.

You might think that if angel investors mainly look for fun, then it’s finally the time to draft a pitch for your non-profit and charity project, and milk their money for a better world. Well, not exactly. For Bill it is very hard to bring up a non-profit project, in his own word “there are many people out there that give money to charity, and some are angel investors. But they don’t do charity with their angel budget”.

But if you can find a way to make the world a better place without losing money, it’s worth a shot. And if the angels don’t listen to you, try me. StartupAgora is not for profit, and I am always curious to find new way to change the world.

Credits: Graffiti by iLenny at Flickr.com

12 Comments

  • the first time you told us this stuff we tough you were crazy but now I understand what you mean – the new offer is redesigned to thrill the investors and it’s working. They still can’t see all the good things we see probably because they can’t code. Eventually they go excited for the new features exactly as you said. Please email me or Louis when you are back to Berlin. We would love to buy you a drink – or two – or three

  • mmm interesting but what does it mean in practice? Not a complain I swear. I would love to know how we can change the pitch to get this

    • My first suggestion: explain what you are doing in one quote AT THE BEGINNING. I don’t know why, but startups in Europe tend to start with a long explanation of what’s wrong in the market, then they introduce the team, and they finally talk about their startup only when everybody is lost and bored. One idea: go to Youtube and search for anything like “winning pitch YCombinator”. You’ll learn a lot.

    • The real question is “what’s an income?”. Twitter and Facebook, they still have a small “income” for their size, but the investors made great money with the IPO (selling the stock to the public). If you are looking for big funding at venture capital level, they’ll look for a huge exit, and good revenue alone are not enough. If you are looking for angel’s funding, everything helps, however startups get the best deals when they can excite the angel investor.

  • Angel Den ….is a den for defensive investors….If the business model for the original idea works in the US then european angel investors are happy to try out ideas with proven business model in the europe/asia….some angel investors just say they dont want to invest in B2C unless there is an initial traction on sales…but B2B they are always ready…bootstrap /crowd fund …and stay away from vampire business with angel investors.my honest advise after i had been through a very bad experience.

    • Indeed B2B is quite popular now. It doesn’t mean that investors will change their mind soon, and then again and again. Investors are human being after all, and they are easily influenced by trends and hypes. Once you learn this lesson (not easy I know), you’ll have a great chance to be successful.

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