This article is the first part of a small series of articles I have written on Business Angels. It has been published by the House of Entrepreneurship/Nyuko on the above link, and translated into French as well.
Here is a copy & paste of it.
When pitching to business angels, startup founders need to pay attention to a number of different things. Let’s discuss these and hopefully help you separate myth from reality.
Many angel investors will choose to invest in sectors that are close to their interests, and they will be more willing to give those startups a chance whose products or brand stories speak to their hearts. Indeed, touching the hearts of potential investors will help you pique their interest and make them want to know more about your startup and business, but remember that this is only the first hurdle that needs to be surmounted.
Equally as important: angel investors want to see passionate founders with skin in the game. They want to see that you have fully embarked on your venture, and that you are invested not just financially, but with your hands, your mind and your spirit.
1. The Vision
Let’s first take a step back, though. It is essential for you, as a startup founder, to get your fundamentals right. What does this mean? First, your vision and your mission statement need to be crystal clear. You also have to be able to provide a precise description of the problem that you are solving. Additionally, you should have a thorough understanding of all aspects of your business model: your value proposition, financial projections, monetisation strategies, target customers, your go-to-market strategy, etc.
2. The Traction
Beyond these basics, a business angel will only find your startup attractive if you are able to demonstrate some degree of commercial traction. Traction not only helps you prove that there is a demand for your product, but also shows the investor that you are able to implement the aforementioned basics in a concrete manner; that they are not mere theories. In fact, I would advise startups to put forward any important milestones that you have achieved whenever you speak to an investor.
3. The Growth Potential
Another aspect that is important to any angel investor: growth potential. As a startup, you need to demonstrate that you are attacking a market of significant size, and that scaling up will be possible. Most investors are looking for a business opportunity with growth potential. If your market is limited to, let’s say, the small region surrounding your headquarters, your ability to grow will be stunted. This means that your reach, which depends largely upon your product, is not wide enough to incorporate economies of scale into your operations. This in turn results in less potential margins and profit, and therefore less attractiveness to potential investors.
Differentiation is extremely important as well: investors will want to understand how you stand out from the crowd. Creating new markets (known as Blue Ocean markets) is not always possible, so most of the time you will be entering an already existing market. This is fine, as long as you can demonstrate your product differentiation and competitive advantage.
4. The Financials
Finally, two key aspects that most business angels will be looking at are your financials and your team. In other words, a business angel will want to know when they might see a return, and how large a return on their investment they should expect. To do this, they will be casting a close look at your financial projections, which should include (but are not limited to) the following:
- The assumptions underlying your business model
- Your financials (income statement, balance sheet, and statement of cash flow)
- Capital budgeting analysis
- ROI analysis
5. The Team
In terms of your team, an investor will be judging your team’s composition and cohesion. They will try to form an opinion on the distribution of the various activities and the processes that you have established within your startup. Here a number of considerations:
- Do you have sufficient key employees to cover the most important areas or tasks?
- Do your team’s members have sufficient expertise? Have they been given enough authority to oversee their area of operation? Do they complement each other? An investor will find much comfort in a business that has a well-rounded and highly skilled team
- In terms of operating control: have you developed operating policies and procedures to control the business and ensure that their investment will not be wasted? As your company grows, you will need to put in place the right processes to support your business’s efficiency
All of the above will form a part of the second stage of the pitch. If you get it right, it will then be taken through to the next phase, which is the stage of due diligence. I strongly advise any of the startups that I mentor to be prepared for this and to offer any background information that can support their business proposition. This includes a detailed outline of the competition, product, pricing, business and financial models, leadership background, regulatory and legal aspects as well as other transactions. Having an engaging pitch is not enough to get a deal over the line; the due diligence stage is the most critical part of all, and it is the stage in which many deals get dropped. But as least this article gives you a head start!