By ExecEdge Editorial Staff
The wide-ranging United States investment marketplace accommodates investors with differing priorities. Some investment professionals target specific industries, developing substantial knowledge in that defined arena. They perform intensive due diligence to find businesses that offer game-changing products or technology. According to seasoned investor Steph Korey, this due diligence goes beyond merely crunching the numbers.
Often, investors search for established companies that meet a predetermined set of investment criteria. In both cases, investment candidates have gained a foothold in the marketplace and have achieved a positive track record. These businesses are generally poised to jump to the next level, and they need the financial resources to put their plans into action.
Snapshot of an Angel Investor
At the other end of the spectrum, angel investors help to fund start-up and/or early-stage companies. In many cases, these investors execute the business’ first outside capital investment (beyond the founders or their family and close friends).
Many wealthy angel investors are “accredited investors” who have a $1 million or higher net worth. Alternatively, the angel investor must show at least $200,000 in annual income to qualify for this exclusive group.
In exchange for the investor’s financial support, they typically want a certain amount of equity (or stock) in the company. Some angel investors may instead accept convertible debt, which is a loan that can be converted to equity in the future. An angel investment has no defined parameters, and it can range from thousands of dollars to millions of dollars.
What Angels Bring to the Table
In addition to their cash investment, an angel investor frequently contributes their entrepreneurial experience and targeted expertise to the venture. To illustrate, a highly successful medical device manufacturer may offer funding and guidance to a startup with an innovative product but with little cash to bring it to market.
The angel investor often leverages their extensive network to help the business move forward. To illustrate, the investor may help the startup secure otherwise off-limits sales appointments with the investor’s business colleagues. In another example, the angel investor may negotiate cost-effective accounting services or discounted advertising rates.
Entrepreneur/angel investor Steph Korey brings supply chain management expertise and mentorship skills to each investment. Possessing a strong belief in universal talent distribution, she typically seeks out underrepresented entrepreneurs who may be good investment partners.
The Value of Goal Alignment
To create a mutually beneficial business relationship, both parties must share a commitment to the same values and goals. That philosophy certainly holds true in the angel investment arena. The UK-based SyndicateRoom, a data-driven early-stage investment group, conducted an early-2022 angel investor survey that showed investor-business alignment to be a top priority.
Specifically, angel investors are often more interested in the founder’s motivations and goals compared to the company’s operations logistics. The founder should take time to share this key information, and they should supplement it with relevant data. Taken together, this information provides the investor with a much clearer picture of the business’ desirability as an investment.
Finally, experienced angel investors are excellent judges of character. They place a high value on authenticity, which could factor into their decision between two otherwise-equal investment targets. The investor also values the founder’s courteous demeanor and prompt responses, as these provide a window into their receptiveness to a collaborative business arrangement.
Alignment with Social Philosophy
Many angel investors work with business owners who share the investor’s commitment to specific social causes. To illustrate, an investor with a commitment to sustainability may choose to support a business that furthers that goal in some way.
Steph Korey believes that each entrepreneur, no matter what their resources, can make an important contribution to a worthy organization. By making that commitment, the business owner can make a positive impact on both the micro and macro scale.
Steph Korey offers sage advice to entrepreneurs at all business stages. “Start now, and think beyond just writing a check! You don’t have to wait until you’re able to donate money—instead, just identify the talents of your team and figure out how to leverage those talents to make a positive impact. Your employees will appreciate the opportunity to give back, and your partner will be grateful for the support no matter what shape that might take,” she concludes.
5 Ideal Attributes on Angel Investors’ “Wish Lists”
Although most potential investments aren’t likely to check all the boxes, angel investors look for certain positive attributes in every investment candidate. Elizabeth Kraus, MergeLane Chief Investment Officer, shares five angel investors’ “Gold Standard” criteria.
Angel investors want to see a CEO with documented achievements in this business arena. Whether they have successfully marketed a similar product, or have engineered a profitable exit from other ventures, their ability to skillfully navigate complex business challenges is highly desirable.
Business owners should have completed extensive research on their target market. They should have also obtained guidance from a reputable market research firm with proven expertise in similar industries.
Ideally, the business’ target market will have a value of $200 million (or more). A target market of over $1 billion is preferable. In addition, if the business foresees a need for future venture capital, a market of $500 million (or higher) is ideal.
Protected Intellectual Property
An investment candidate’s intellectual property should have ironclad protection via one of three methods. Patents and trade secrets are two commonly accepted intellectual property protection vehicles.
In certain cases, the intellectual property may have been previously protected by another company. However, the protective period has lapsed, and the intellectual property can now be claimed by another entity.
Ideally, the business has already realized substantial product sales volume. MergeLane’s Elizabeth Kraus says a sales volume of at least $300,000 is an optimal figure. Alternatively, the company has documented sales/licensing contracts that ensure distribution of upcoming production.
$4 Million Maximum Valuation
An angel investor ideally wants a 5X-10X return on their investment. Therefore, they prefer that the business have a pre-revenue valuation of $4 million maximum. This number is not set in stone, as it can be affected by the industry, business’ geographic location, and business stage.
Elizabeth Kraus emphasizes that she, along with other investors, has made exceptions to these and other rules. However, businesses that fulfill these criteria (or come extremely close) will have a significantly higher chance of raising the capital they need.
Strong Emphasis on the Financials
Angel investors are keenly focused on their potential investment returns. Therefore, they carefully analyze each candidate’s current financial position and future projections. Forbes highlights three finance-related issues important to angel investors.
Intimate Financials and Metrics Knowledge
Investors want to know that the business’ founder genuinely understands their company’s financials and key metrics. Besides providing an in-depth explanation of each term, the founder should be able to coherently address questions related to the term’s applications. Common financial terms and metrics include:
- Gross Margin
- Customer Acquisition Cost
- Lifetime Customer Value
- Monthly Burn Rate
- Projected Revenue Growth
Realistic Financial Projections
An angel investor wants to support a business that is positioned to achieve significant growth in a realistic timeframe. If a business owner projects accelerated growth, but they lack the sales figures and infrastructure to support that expansion, the investor may well discount that candidate. Other unrealistic projections may experience the same fate.
Reasonable Capital Use and Burn Rate
Each potential investor wants to know exactly how their capital will be used. Equally importantly, they want to know the business’ estimated monthly burn rate.
With this knowledge, the investor can determine when the next round of funding will be needed. These figures also enable an investor to see if the business’ capital requirements and fundraising vehicles are in sync. Finally, the investor can tell if the business’ cost estimates are in line with similarly positioned companies they have supported.
More Key Questions
Also on the financial front, the angel investor wants to know how long it will take for the business to generate a profit. In a similar vein, the business owner should provide information on the company’s projected capital needs (if any) for the future.
The investor also wants details about product liability and/or regulatory risks. The founder should expect to provide information on the steps the company has taken to mitigate these risks. If the business owner can document that they have lessened specific risks, they may be in a better position to attract investors.
Industries to Watch in 2022
SyndicateRoom’s early-2022 angel investor survey produced some intriguing results. Collectively, the angel investors hoped that additional sustainable investment opportunities would emerge during the year. These successful investors also expressed a desire to work with more female-owned and ethnically diverse businesses.
The angel investors also predicted substantial growth in health technology investment in 2022. Moving down the list, they planned to invest in the green technology, cryptocurrency, and education technology industries, in that order.
About Steph Korey
Entrepreneur and angel/early-stage investor Steph Korey brings a multifaceted skill set to her investment activities. Her rich multicultural upbringing helped to drive her interest in collaborative entrepreneurship. At Brown University, she earned a B.A. in International Relations. Korey also earned her MBA from Columbia Business School.
In the business arena, Steph Korey served as co-founder of lifestyle brand Away. She also excelled as Warby Parker’s Head of Supply Chain, leading the team focused on product development and distribution. Finally, Korey consulted with growing eCommerce mattress retailer Casper during her time at Columbia Business School.
Today, Steph Korey frequently invests in startups and early-stage businesses. She mainly focuses on talented, underrepresented entrepreneurs who might not qualify for other funding sources. Her distinctive business experience places her in an optimal position to mentor her investees along the path to success.