“Show me how to sell an ice maker to an Eskimo, and I will fund your startup.” So you decide to take a trip to the land of Eskimos and return with 10 signed contracts. But your angel investors are yet not happy as they want better proof of your business potential.
And the story goes on!
The process of getting startup capital from angel investors is no fairytale. Rather it’s a tedious, and time-consuming process. You commit a single mistake and your business angel flies away never to return again.
Finding startup investors who support you through thick and thin is no mean task. Then again, you can’t embark on a startup journey without the support of angel investors and venture capitalists. Therefore, it’s very important to know what exactly draws a business angel towards a startup or alarms him of a potential downfall.
Here I explain 7 danger signs that angel investors typically look for in new businesses; try avoiding/rectifying these and there’s a chance your startup will become the ‘blue-eyed boy’ of startup investors.
The problem: You don’t have personality traits to be a leader
As a movie fanatic, I just can’t resist drawing reference from one of my favorites ‘The Godfather.’ Forget for a moment the mafia war and organized crime. Just take a look at Michael Corleone, The Godfather and you know who the leader is!
This is the kind of leadership personality (minus the violence, of course) that angel investors look for in an entrepreneur. It makes no difference if you attend the meeting in a casual t-shirt and faded jeans but it definitely matters to investors if you fail to exude the necessary qualities of a good leader.
Not all are born to be a leader but some traits can be certainly developed. So take a long, hard look at your strengths and weaknesses. Consult a trusted friend, the one who won’t shy away from speaking the truth. Focus on developing yourself and your team. Angel funding becomes easy if you can show a dedicated, hardworking team with relevant startup experience. And finally, be honest and frank with your investors and they will surely appreciate your openness.
The Problem: Your Idea is Great but You Fail to Show Traction to Angel Investors
“You have a great idea, but, sorry I am not convinced yet. Please get in touch when your business touches $100K MRR (monthly recurring revenue).” You feel like giving him a sharp reply, “Thanks but when I reach that magic figure, investors will be lining up with better financing options!”
The fact, however, remains that business angels always seek some solid proof of progress before parting with their money. The proof can be anything like your app download conversion rate, how much traffic your website gets, how the press covers your story, and so on. The greater the traction, higher will be your startup valuation and easier becomes the financing process. For early-stage startups achieving significant traction can be really difficult.
Work out a ‘Micro-Traction’ strategy to show your business angels small but measurable growth trajectory. For instance, you can work out the revenue growth over the last three months as the proof of monthly earning. Establish the success of your customer acquisition strategy by showing the number of customers you have acquired in the last 3 months. This solution is applicable to new businesses that have already launched their products in the market.
The Problem: You Haven’t Considered the Market Competition
“My idea is simply fabulous, who cares about competitors!”
While looking for business investment, such overconfidence and naivety may boomerang and can chase away investors, as they may start wondering if you indeed have a sound understanding of the market.
Before exploring business angel funding options, carry out an in-depth research to know everything about your competitors, their corporate culture, products and services they offer, market reputation, employee retention rate, their advertising plans, product pricing strategies, social media presence and so on.
The Problem: Your Financial Forecasting Sounds Impractical and Baseless to Angel Investors
“You claim to earn 40% profit on sales in the first three years and that too by spending only 5-6% of the yearly gross sales on marketing!”
A report prepared on the basis of unrealistic assumption is sure to hit the trashcan. If you have no clear answer to important financial questions then I suggest some serious number crunching. Work out realistic financial projections and forecasting, before you start looking for business investment.
Prepare yourself to face questions like how much startup capital you are looking to raise and how long the fund will last, how you propose to spend the initial capital on a monthly basis, have you done financial projections for next 2-3 years and on what basis, what are the major cost components of the manufactured product/offered service, what are your unit economics and finally what is your expected gross margin.
The Problem: The Startup Investor Feels there is no Demand For Your Product/Service in the market
“The value of an idea lies in the using of it.”
Those who invest in startups are very serious about this key point i.e. “no market need”. If your product/service doesn’t have a persuasive value proposition that convinces the buyer to commit to purchasing, don’t expect angel investors to take interest in your project.
Even a simple mop can turn into a miracle item, that’s what the famous American entrepreneur Joy Mangano showed us and how! Being a divorced mom with three children to raise, she faced a very practical problem of keeping her home clean and organized. And then she came up with the self-wringing Miracle Mop idea and the rest is history. A self-made millionaire, now managing her own business empire, she can be a source of inspiration to entrepreneurs, aiming to climb the ladder of success with a single magic idea!
I gave this example just to explain you don’t need to be a techie or a scientist to come up with innovative ideas that solve specific problems in a unique way. Here are few ways you can evaluate the market demand for your new product idea. Just find out the industry you are passionate about and assess if that industry does have the potential to make you rich and fulfill your entrepreneurial goal. Also, aim to serve a segment that’s under-served and is looking for a solution. Ask yourself if your idea is easy-to-implement and economical as well.
The Problem: You don’t have a feasible marketing plan
“You don’t have a marketing plan and you want me to invest in your business venture?”
You are most likely to hear this question from angel investors if you attend the meeting without a marketing strategy. They prefer an entrepreneur who can present a concise business promotion strategy and can explain the customer acquisition cost and other related factors clearly.
Before you start seeking investors for startups, prepare to answer questions like if you have a PR strategy and full-proof plan ready to market the product/service, does your business has active social media presence, have you calculated customer acquisition cost and customer lifetime value, what’s your advertising plan, have you thought of the sales cycle.
How to create a perfect investor pitch deck? Know the answer.
The Problem: You Venture Into An Industry/Segment About Which You Have Little Knowledge/Expertise
Do you believe that it is possible to found a startup with a great idea but without in-depth industry knowledge? Perhaps you are drawing inspiration from the founders of airbnb or Uber who started with little domain knowledge. Well, your investor might not be in a mood to accept that because facts as of now prove that without thorough domain experience startups have to struggle a lot to survive. Especially those targeting the advanced fields like enterprise tech, medical equipment manufacturing or research should have domain experience to ensure startup success.
Domain experience usually refers to a combination of practical experience of the industry and fairly deep functional knowledge. Suppose you are eyeing the technology domain. So, if you have previously worked in a tech company that surely helps in understanding the industry, its key players, which direction the market is moving and how you can take your business forward matching the market pace. If you are lacking in domain knowledge you can carry out own research to learn more about that particular market. Another solution is to include co-founders and employees in your team who have relevant domain experience.
When an entrepreneur looking for business investment fails to handle the above issues, their capital raising plans may go awry. Don’t let a negative situation dampen your spirit. Take a deep breath, do a bit of soul-searching, reevaluate your business ideas, assess your team’s performance and stability and there you are ready to woo your angel investors!
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