Securing early-stage venture capital is notoriously difficult, particularly for first time founders. But what’s often neglected is the other side of the equation – the difficultly for angel investors to differentiate between a company worth investing in from something that is unlikely to succeed.
Over the last eight years I have co-invested with my business partner Trevor Folsom in some of his 50 angel investments that have generated six times returns and include some of the most promising startups like Canva, Ipsy and Car Next Door.
Over this time, I have observed a set of factors that angels like Trevor look for to identify high potential startups.
Here is a brief introduction to what angel investors should be looking for and what founders should seek to demonstrate during their capital raising.
If you start with the premise that early-stage investing is a multi-faceted gamble, then you can learn from an industry that is almost a thousand years older than the tech startup industry – horse racing.
Modern thoroughbred racing had its beginnings in the 12th century when English knights returning from the Crusades brought with them Arab stallions that were mated with English mares. This soon saw the nobility wagering on the races. Over the centuries the art and science of picking winners has developed to a stage where a set of factors and formulas exist to predict the chance of success.
Modelling these proven factors translates to an Investibility framework which can increase angel investors’ chances of picking a winner.
Pictured below, these investibility components are broken into nine “business factors” (white), two “intrigue factors” (black) and four “deal factors” (blue).
Just like horse racing, the nine business factors range from qualitative to quantitative and sit on a spectrum from those influencing survivability (will the horse last the race?) to thriveability (will the horse win the race?).
However, riderless horses don’t win races and inexperienced riders are unlikely to have a podium finish. Just like a competent jockey is key to horse racing, a quality founder or founder team is crucial to driving a startup’s success.
Of all business factors, investors should focus on the founder first. They will assess the experience, skills, attributes, attitudes, vision and values of founders as strong indicators of potential business success.
The two intrigue factors – the pitch and investor deck – summarise all nine business factors with the purpose of enticing investors to want to find out more.
With angel investors scouring countless decks and pitches it’s important to capture their attention within the first 30 seconds to stand out before they move on.
Investors are just as interested in the structure of the deal as the business itself. A deal must have an attractive cap table and terms plus a clearly communicated exit strategy and time horizon.
Not only this but the best angel investors also add an element of gut feel beyond their analytical assessment. They are looking for founders who they like and have an affinity with (regardless of their resume) and a business in an industry they understand, with a bigger mission they want to support.
Angel investing is one of the least understood asset classes. And whilst it is a gamble, by following some age-old principles taken from the horse racing industry angels can take an informed risk that dramatically increases their odds of success.
By looking at each of the above investibility factors, picking winners or getting picked doesn’t have to be governed by punter’s luck.
Just as first-time race goers shouldn’t pick horses based on their name, newcomer investors shouldn’t get carried away in the moment by an elegant pitch or by someone they know.
Equally those from a typical venture capital background who create unwieldy financial models with comprehensive risk assessments will unlikely have a good track record of picking winners because angel investing is first and foremost about people investing in people.
This article was first published on LinkedIn.
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