Key Criteria Investors Look in Angel Investment
For start-ups, getting funded is the most crucial task and fundraising leads to growth. Majority of entrepreneurs get distressed when it comes to the initial funding as the process is easier said than done.
Let us understand the basics.
An investor is skeptical and cautious while investing their valuable time and resources into a start-up. Hence, as an entrepreneur, one should stand in the shoes of an investor when asking for financial support. An investor generally looks into the following components of a start-up:
The Product or Service
Based on their knowledge, an investor assesses the product/service to identify its strengths and weaknesses before deciding to invest. An investor values the product based its utility, market size, competition, growth potential, and ROI
A promoter is usually appointed and has the responsibility of procuring the initial investment and new stakeholders. The promoter negotiates business contracts on the behalf of the start-up and helps in establishing the cooperative relationship.
The capability of a founder and his team are factors that influence investment decisions. No matter how ambitious a start-up vision is, without the right people at the top management, it will be a struggle to get off the ground. The management team’s performance and knowledge directly influences investors’ valuations. Lack of understanding of the market trends and demand can kill the business before it even reaches its break-even stage.
The right team is essential to achieve every possible opportunity oriented goal set by the founder and to grow exponentially and efficiently.
Market Size and Growth Potential
Market challenges affect the decision of an investor looking into hundreds of start-ups. An investor looks into market size & opportunity, growth potential, valuation, and revenue generation.
The market size helps in defining the start-up valuation. An investor looks into Total Available Market (TAM) and Serviceable Obtainable Market (SOM) while assessing the market size. The total market demand for a product is known as TAM and the segment of TAM that is targeted by your product around the geographical reach and which can be captured is SOM.
The Execution Potential (Capability)
Execution capability represents the elements that add the unique execution capacity to a particular start-up, regardless of the product features. Elements such as team strength, experience, fundraising skills, business model, product traction, and monetization strategy add to the uniqueness of the execution capacity.
Investors need a detailed report on the amount to be invested and the payout/return schedule. Hence one needs to prepare and update the investors on financial projections, ROI analysis, risk analysis, and cash usage report.