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Launching a startup is no small feat, but securing the funding necessary to turn a promising idea into a thriving business is another beast entirely.
So what is it exactly that angel investors are looking for in a startup?
Mike Eckert, board chairman of angel investment group Gulf South Angels, sat down with Daily Report to share his insights.
- Market opportunity
According to Eckert, angel investors want the product or service a startup is offering to address a real problem with a scalable solution.
It’s important that a startup demonstrates a thorough understanding of its market and the scope of the problem it’s trying to solve, as a well-defined market with demonstrably high demand goes a long way toward building investor confidence.
As Eckert puts it, “How large is the problem? Is it like two people or is it China?”
- Strong leadership
The strength of a startup’s founder is paramount. Angel investors spend a fair amount of time evaluating a founder’s experience, market knowledge and past entrepreneurial endeavors—whether successful or failed. (Eckert says he actually likes the ones who’ve failed a bit better, as they’ve likely learned from their mistakes.)
Character traits like coachability, honesty and a sense of responsibility are also weighed heavily.
- Product roadmap
Angel investors want to know that a startup has a well-defined “product roadmap,” or a plan of how its product or service will evolve over time.
A startup should also demonstrate a keen awareness of its competition. A claim of “no competition” is one of Eckert’s biggest red flags when evaluating a startup, as such a claim often signals a lack of due diligence or market knowledge.
It’s also worth noting that, for tech startups in particular, patents add significant value.
- Strong financials
Eckert says he and his fellow angel investors spend “a lot of time” with a startup’s financials during the evaluation process, as strong financials indicate how efficiently a startup might be able to use its resources to grow and become profitable.
“If a startup doesn’t have a good handle on its financials,” Eckert says, “that sends a signal that that’s how they’re going to run the business.”
- Exit strategy
While some startup founders have no intention of ever selling their businesses—Eckert calls these “lifestyle companies,” and Gulf South Angels avoids them—the vast majority of founders have an exit strategy in mind.
While early-stage companies may not have a concrete plan, they should at least have a general vision. For example, a medical device startup might aim to be acquired by a global manufacturer that can scale production and sales.
A startup can “score points” with angel investors by being able to effectively articulate its exit strategy, according to Eckert.
Gulf South Angels is a New Orleans-based angel investment group with 135 members across 12 states. The group has invested $23.5 million in 57 companies across 20 states.
Read a recent Daily Report feature on Gulf South Angels here.
