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The 4 things angel investors look for that VCs don’t

The 4 things angel investors look for that VCs don’t

There’re plenty of articles out there purporting to provide foolproof tips on pitching a business idea to investors. But what most of them leave out is the process that must come first: finding potential investors willing to hear you out.

For businesses that are already in early-stage operations, that’s not too much of a problem. As they have tangible results to show off, they have an easier time getting an audience in the venture capital (VC) circuit.

But for business ideas that are still embryonic – convincing any serious VC firm to make time for you is all but impossible. But there is another option for entrepreneurs to get an idea off the ground: angel investors.

While angel investors won’t be cutting an entrepreneur a check for millions of dollars in startup capital, they are a viable resource for seed funding. But even though a would-be founder has to prepare the same kinds of pitch decks, financial projections, and market research for an angel investor presentation that they would when meeting with a VC firm, there are some major differences in what they’ll be looking for.

To help inexperienced entrepreneurs approach angel investors the right way, here are four things that they’ll be looking for in a pitch that a VC won’t.

1. The ability to pivot

When evaluating a startup, a VC investor wants to see a clear path from what the startup is doing today straight through to profitability. They’re not interested in funding a company that’s going to swing and miss several times before finding a winning formula.

But angel investors don’t think that way. They’re not necessarily interested in how your startup will end up succeeding. They’ll do appropriate due diligence to see that your initial plans have a good chance of success. But that’s not all they’re looking for. They’re more interested in the odds that you and your team will find ways to overcome any obstacles you encounter – even if it means reinventing your business.

In startup vernacular, this is called pivoting. And some of the world’s most successful startups have done it more than once on the way to market dominance. So, while it’s a good idea for a pitch to an angel investor to go into detail about executing your initial plans, you’ll also want to demonstrate your startup’s potential as an idea incubator. If the investor believes something fruitful will emerge from your startup, they’ll be more likely to take a gamble on it.

2. A genuine commitment to the business

It’s a well-known fact that startups tend to fail – a lot. Some estimates place the startup failure rate in the US as high as 90%. That’s one of the reasons VCs only look for businesses that are already progressing toward profitability. But the fact that angel investors are willing to provide seed capital to entrepreneurs says something important about what they’re looking for.

It tells you that they’re willing to bet their money on finding startups that will overcome overwhelming odds to become part of the 10% that make it. And since they’re investing at such an early stage, there’s one thing they’re evaluating above all else: your commitment to making your vision a functioning, profitable reality. So, you’re going to want to lean heavily into your personal story and journey to demonstrate your passion for your idea and let the potential investor know you’re going to do everything in your power to prove them right for taking a risk on you.

They’re also going to want to know how much of your own time you’ve invested in getting your idea ready to launch. If you’ve taken the time to educate yourself about the industry you’re trying to break into, tell them about it.

In most cases, the angel investor you’re dealing with won’t know your corner of the market in great detail but may have a good idea of how your target industry, in general, works. So, they will want to know that you’ve devoted yourself – and your time – to learning everything you can about the market you’re trying to enter. It serves as yet another measure of how committed you are to succeed.

3. Persistence and follow-through

When dealing with a venture capital firm, there’s a good chance you’re going to be in touch with a phalanx of assistants and other gatekeepers on your way to getting a meeting. And even if you manage to catch a decisionmaker and give them your most captivating elevator pitch, you’re still going to end up dealing with their whole team at one point or another.

Angel investors, by contrast, typically don’t have a team. And if they do, they’re more likely to be business advisors, not general staff. That means they’re going to be the ones communicating with you unless you slip through the cracks. It’s important to recognize that most angel investors will be dealing with innumerable entrepreneurs seeking their attention – and their money.

So, you shouldn’t give up if you don’t get a response right away from an angel investor. Sometimes, their silence is nothing more than a function of their limited bandwidth to deal with you at that moment. Other times they’ll mean to respond to you and simply forget.

But some of them go even further. They use your initial approach as something of a test. They want to see if you’re going to be persistent or give up if they don’t answer immediately. In most cases, it will pay to keep following up with an angel investor. As long as you’re being polite and not just cluttering up their inbox, it’s fine to keep reaching out.

In a recent webinar on early-stage fundraising, Eric Bahn, co-founder of the Hustle Fund, related a story that encapsulates this idea perfectly. He recalled following up with a potential angel investor no less than 13 times without receiving an answer.

Eventually, he reached out to check on the investor’s wellbeing when news of some strong storms was reported in their area. And that investor ended up not only responding – but wrote him a check for the money his venture needed to get off the ground.

4. A clear pathway to an early exit point

Even though every startup investor is looking to make a solid return on investment by backing a winner, there’s a distinct difference in the timeframes that VCs and angel investors will want to cash out. In the case of the former, the industry average for an exit is between 10 and 12 years after investment. In the case of the latter, it’s between 2 and 5 years.

This means an angel investor will be far more concerned with how you plan to get them to an exit point early on in your venture’s life. And if you can demonstrate how your business plan can facilitate a quick, profitable exit, the more likely it is that you’ll secure the funds you need.

Keep in mind, though, that not all exits are created equally in the mind of the angel investor. Most would prefer that your startup end up attracting the attention of a larger firm and receive a lucrative buyout offer. Barring that, they’ll want to know that you have a growth plan that will get you to a subsequent VC funding round by the end of that 2 to 5-year window.

And if you’re asking an angel investor to bet on your startup reaching an IPO stage within five years’ time, you had better have one heck of a supporting case to convince them. After all, the median time to get to an IPO after an initial VC financing round stands at six years. So, unless you’ve got some fancy tricks up your sleeve, an IPO exit will be a tough sell for an experienced angel investor.

Paint the right picture

By knowing the specific differences between what an angel investor is looking for and what a VC investor is looking for, you can adjust your pitch to improve your odds significantly. Keeping these four topics in mind is an excellent place to start. This isn’t an exhaustive list, though.

You’ll also have to develop a feel for the personalities of the angel investors you’re approaching. Some of them are investing for pure profit, but others are just looking for projects that they believe in. Figuring out which can help you to decide what to highlight in your presentation. But having all of your bases covered is always the way to go. And if your idea is strong, your homework is airtight, and your passion is evident, you’ll find someone who believes in you. It’s just a matter of time.

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