Angel investment is a type of equity financing whereby the investor invests in early-stage startups and supplies funding in exchange for taking an equity position or stake in the company. This type of financing is usually used by non-established startups that do not have enough cash flows or collateral with which they can secure loans from financial institutes.
As a result, Angel Investors come forward to help these struggling startups in order to support their unique and life-changing discoveries. Angel investors know that the risk of failure for a startup is unusually high so they investigate and analyze everything in detail to feel confident that the potential rewards are worth the risks.
In order to review the variety of concerns and key issues, angel investors undertake due diligence before they start investing in a startup. Firstly, they look to see if there is a great founder or management team.
1. How is the management team?
Investors, many times, look for the team behind the startup more than the product or service. They believe that if the team is well skilled and equipped with the knowledge of the market, as well as what they are trying to sell, then they are likely to succeed in it too.
However, if there is not a quality human resource, then no matter how outstanding your product or service may be, the team would not be able to generate lasting sales. They also look at whether the CEO and team are enjoyable to work with, and whether they are trustworthy or not.
At this stage, you can also involve some experienced advisors who can help the team conflicts and bridge the gap between the team that is still learning and growing.
2. Does the CEO have knowledge about financials and key metrics of the business?
Finance is the heart of businesses and without which, a business cannot grow and last. So having sufficient information about financial knowledge is a basic criterion or requirement for a CEO who is planning to start his business and is capable of articulating them coherently.
This involves estimates about the monthly burn rate of the business, gross margins, projected growth, an acquisition cost of a customer, gross revenues and expenses, KPIs, EBITDA, etc.
3. Is the initial investor pitch interesting and professional?
Before an angel investor funds your startup, they require you to give a business pitch. In this pitch, you should summarize the particulars of the business in detail, as well as answer all of their concerns. This should be done in a way that inspires and influences them to make that investment right away without any second thoughts and doubts.
Through this pitch deck, the investor will hope to see an interesting business model that has a big opportunity to grow and capture the market. Thus, make sure your team prepares as well as delivers a great pitch.
4. How will the funding be used and what progress will be made with that capital?
Investors will want to know how you will use their capital. This can involve you giving them an estimated burn rate so that they can know in advance when you will need the next round of financing. This will also ensure whether your fundraising plans and estimated costs are reasonable given their experience with other firms or not.
This is all part of the due diligence that angel investors undertake before they start investing in a startup. They look at the management team, financials, the investor pitch, and the startup's plans for the funds.