Placing yourself in the shoes of a potential investor can be a useful strategy when you’re seeking funding from angel investors. For example, which factors would convince you to provide equity funding to a startup if you were an angel investor yourself?
As a general rule, the two main factors are the company’s market and the expertise of its management team. Angel investors will need to be assured that the market for your company’s service or product is substantial enough to allow the company to enjoy a satisfactory revenue stream. Annual revenue projections for small businesses seeking angel investors should realistically range from several hundred thousand dollars up to several million dollars within the next five years. In contrast, most venture capital firms look for companies that will attain annual revenue figures of $50-$100 million within 5 years.
Realistic, acceptable revenue projections are important to angel investors, but they’re not the only consideration. Angel investors also want the companies they fund to have capable, credible, experienced management. Success in growing companies in the past is important for both you and your management team members. Angel investors will want to have confidence in every key member of your operational team.
A company that is able to erect barriers around its customer base or otherwise block entry into its market will also be attractive to angel investors. If there is little potential for additional competition to enter the market, a startup business will represent a much more appealing investment opportunity. Fewer competitors will typically convert into additional revenue and bigger profits
Your company’s location is another factor angel investors will consider when they’re evaluating a potential investment. Most angel investors prefer to fund companies that are within fairly close proximity to their own location. The nearness allows interaction between the company and the investor to occur on a more frequent basis. This interaction usually benefits the company, as the angel investor might be able to offer guidance and otherwise help the company in its developmental stages. Research indicates that up to 70% of all companies funded by angel investors are located within 50 miles of the investors.
But, the most important consideration for an angel investor is whether a liquidation event is foreseeable. A liquidation event (typically a buyout, merger or initial public offering) triggers a return on the investor’s capital. This explains why angel investors are concerned with a company’s future liquidity potential more than any other aspect of the company.