Entrepreneurs often ask me: what kinds of companies are likely to be funded by angel investors?
Because angel investors are individuals and all individuals are different, it’s really hard to answer this question. However, from my experience reviewing thousands of angel investment opportunities and meeting with thousands of angel investors, I can say there is a list of criteria that most investors strive to meet.
Here is the Angel Investor Deal Gold Standard:
1) Experienced leadership – a CEO with previous successful exits and/or a proven ability to take a similar product to market or exit
2) A HUGE market – an addressable market of at least $200 million, but over $1 billion is ideal (If the company needs to raise VC money in the future, the market should be at least $500 million.)
3) Valuable intellectual property – IP protected by patents, trade secrets, or the barrier of time to replicate
4) Proof that someone will actually buy the product or technology – meaningful sales (I would say $300k or more) or revenue traction (The company is earning revenue and/or letters of intent or sales/licensing contracts are in place.)
5) A quick and clear path to market – a lack of major go-to-market hurdles (i.e.: FDA approval)
If these barriers have already been overcome, it can count as a significant barrier to entry along the lines of #3.
6) A quick and clear path to liquidity – identification of likely acquirers that have made similar acquisitions in the recent past and/or limited barriers to profitability in the near future
Companies do not have to IPO or be acquired for investors to achieve liquidity. Revenue sharing or company buy-backs can produce excellent returns for investors, but regardless of the structure, most investors hope to see a return on their investment within 5-7 years.
7) The ability for investors to realize a 5 – 10x return on their investment – compelling information indicating that acquirers will purchase the company for 5-10 times the valuation, or the company will be able to buy back the shares or IPO at that multiple
8) A valuation of $4 million or less – Since angel investors want to make a 5x – 10x return, a pre-money valuation of $4 million or less is preferred. This of course varies depending on the industry, geographic location and stage of the business. Most of the pre-revenue software deals I see are between $1 and $4 million, but those under $3 million tend to get more investor interest. Additionally, I do see and have invested in pre-revenue deals with significant intellectual property, i.e. medical device deals, with valuations north of $10 million. However, medical device, biotech and other IP-heavy companies with valuations below $4 million tend to get more investor interest.
9) Preferred Stock – There is a lot of controversy about the pros and cons of convertible debt, but most of the investors I know strongly favor preferred stock equity ownership. With equity ownership, the investors and entrepreneurs agree on a company valuation and the investors’ ownership is determined by the amount of money they invest as compared to the valuation of the business. If investors purchase preferred stock, it means that they will get the money they invested back before other designated investors and creditors.
Note: As an investor, I have made exceptions to every single one of these rules, as have most of the investors I know. If your company doesn’t meet all of these criteria, there is still a chance angel investors will invest. This is simply a gold standard.
That’s my best shot at outlining the criteria to which most angels strive. From my experience, companies that meet this criteria (or come close) will have a much easier time raising money.
I am extremely disciplined and focused. However, this can also be a detriment. Anything I perceive as a distraction from my to-do list feels stressful, and I have to constantly tell myself that off-the-to-do-list opportunities are often the best opportunities. I was recently reminded of that.
For the final episode of Fund81's first season, I interviewed Jaclyn Freeman Hester from Foundry Group. As someone relatively new to the industry, she has a fresh perspective on what's compelling to institutional investors and an incredible pulse on the landscape for emerging VC managers. Enjoy!
Could I be more effective if I simply surrendered to a schedule that felt natural to me? After some serious self-reflection and experimentation, I can unequivocally say YES.
I’m trying to focus my time on opportunities to operate in my zone of genius and a few select priority areas in line with my passions and in which I feel I can make the most impact, aka my true north. To help all of us stay the course, I thought it might be helpful to share those priorities.
I gave first without question for almost five years. It came back to me in spades. I don’t regret it, and I think it was exactly the right thing for me to do at the time. But then….it just got to be too much.
Dave Balter, the CEO of one of our MergeLane portfolio companies, Flipside Crypto, shares his perspective on investing in the cryptocurrency space. Dave is obsessed with and extremely knowledgeable about cryptocurrency, and has an interesting perspective from both sides of the table.
Most venture capital funds target a minimum ownership percentage when making investments. In this Fund81 episode, Amish Jani, a founder and Managing Director of FirstMark Capital, shares his take on why ownership matters and how funds of different sizes and strategies determine ownership targets.
Venture capital funds are typically structured to have a 10-year lifespan, but venture-backed companies often take more than 10 years to achieve an exit and return capital to their investors. In this Fund81 podcast episode, we discuss solutions to this problem with our our guest, Roland Reynolds.
This year, I decided to do an experiment. To build our MergeLane investor and mentor network, I dedicated four months to exclusively focus on meetings that involved skiing.
Conscious Leadership has been a game-changer for our partnership and our investing. For this Fund81 podcast interview, I invited my business partner at the MergeLane venture fund for high-potential startups with at least one woman in leadership, Sue Heilbronner, to talk about Conscious Leadership.