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The 3 Essential Questions You Have to Answer for Angel Investors

Are you wondering about angel investment? How to find investors? What steps you need to take?

I suggest you start by asking yourself these three questions. If you can’t honestly answer “yes” to all three, revise your plan, beef up your team, refocus, or pivot.

1.) Can it really grow?

Growth means a strong market and a deliverable that’s scalable and defensible. By scalable I mean that you can gear up to sell 10 or 100 or 1,000 per hour. Services generally aren’t scalable (except web services) because you need to double head count to double sales. Defensible doesn’t mean you have to have patents and defensible intellectual property regardless; it does mean a distinguishable difference that people can understand in an instant.

2.) Do you have a credible team?

Credibility with startups begins with startup experience. A good team almost always has at least one person who’s been through a startup before. It doesn’t take startup success, ironically, because going through a startup failure is still great real-world experience. The background is that angel investors have been there themselves, generally, and they know that nothing prepares a person for going through a startup like having already gone through a startup.

It also usually takes a team, not just an individual, because two or three people are more likely to span some of the skills needed. Somebody likes numbers, somebody likes to sell, somebody builds product, and these somebodies are rarely all the same people.

3.) Are you committed to an exit?

Just growing and thriving isn’t enough for angel investors; you have to be able to give them a way to get their money back out of your business. It’s not that they don’t want you to succeed; of course they do. But there is a scenario in which your company is healthy and cash flow independent, while your angel investors wrote checks to help you get started and never get money back out to make your company a good investment for them.

Investment ends up fairly simple: writing a check for you in investment. And return on investment is zero until there is actual money back. Return is measured in money. While you get the satisfaction of success in several different scenarios, unless you actually create liquidity for them, your angel investors get no return.

It doesn’t take defining the exit in great detail from the beginning; you’re predicting the future here, which nobody does that well, so you get a lot of benefit of the doubt. But you do have to be committed to working for that exit. You can stay in your new business forever, for that matter; but you need to help your angels make a return in 3-5 years.

If you can’t answer yes to all three of these questions, you should be looking for a different way to finance your startup.

Written by Tim Berry

user Tim Berry

Tim is the founder of Palo Alto Software and bplans.com, the co-founder of Borland International, and the official business planning coach at Entrepreneur.com. He has been called the "Obi-wan Kenobe of business planning" and "The Father of Business Planning." He is a serial author of books and software on business planning.

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Comments

2 thoughts on “The 3 Essential Questions You Have to Answer for Angel Investors”

  1. KirkSchlupp says:

    Excellent questions with excellent and practical guidance. Thank you for your post!

  2. Valdir Arnaldo says:

    I totaly agree whith this opinion. Congratulation.