Thursday, July 12, 2012

Make Sure Your Startup Domain is Investor Friendly

We are talking about angel investors here, meaning people who invest their own money in early-stage startups for a share of the equity. These people are highly focused on investment areas they know, which have a large opportunity for growth, revenue projection of $20M or more in five years, and a high return that can be realized via an exit within five years.

Generally, the same criteria applies to venture capital investors, although they invest other people’s money, at a later stage, in larger amounts. Both are excited by innovative new products and services, and neither is normally interested in deals in the following domains:

  • Consulting services. This type of business is usually based on the expert skill and reputation of an individual or small group. Such a business shouldn’t need a large investment to get started (no product to develop), and it probably won’t scale quickly (limited supply of experts). Accordingly, investors will decline.
  • Restaurants and retail. Local and family businesses, such as cafes and retail shops, are also not investments that angels tend to consider, unless you are proposing a new national franchise. Otherwise these will not scale, and cannot show a growth and return rate to excite professional investors.
  • Gambling and porn sites. Most professional investors value their integrity and image so much that they would never consider investing in a business that might be offensive to many, or raise legality questions in the minds of business associates and future clients. This is definitely the space for bootstrapping and personal networking.
  • Real estate. Angel groups almost never supply financing for real estate purchases, or personal loans. Even in today’s market, there is capital available from financial institutions at a lower cost for these purposes. It doesn’t make financial sense to give up equity ownership on an asset purchase, with built-in collateral.
  • Non-profit businesses. I think investments in non-profits are called “contributions.” In fact, many angels investors are also philanthropists, but the process of finding them and working with them in this context is totally different from the angel investment process. It’s hard to promise a high financial return from a non-profit.

Be wary of brokers who claim they can find angels in these domains, for an up-front fee and a percentage of the investment. In general, you shouldn’t be paying a fee to have someone evaluate your investment opportunity, or “guarantee” to find you investors. I recommend going only with legitimate angel groups, accessible through national websites like Gust, or locally publicized organizations.

Even if you are in the right domain, you should remember that angels invest in people, even more than ideas or specific business ideas. They put high premium on entrepreneurs who are experienced in building a business, and experienced in the domain of their current proposal. First-time founders will find that most angels turn into mirages.

Entrepreneurs in an unfamiliar domain better find a partner who has been there before they apply for funding. Early-stage these days means early customer revenue received, and early product in the market. If you have no product, no customers, and no revenue, talk to friends and family for that initial funding.

So if your domain is among the ones outlined above, you probably won’t find any angels lurking. That doesn’t mean you should give up your dream. It just means you have to take a harder look at the other alternatives listed in my earlier article on the “The 10 Best Sources of Cash to Start Your Business” for startups. A real entrepreneur loves a little challenge, to be the shining light in the crowd.

Marty Zwilling


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3 comments:

  1. Thanks Marty! The above business mentioned are lucky enough to get angel investors and i completely agree to that. As you also said "a real entreprenuer loves a little challenge," and so i am one of them.

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