You have the idea, the motivation and a structured plan to launch your new tech business. Now all you need is the money to get started - time to go after an investor.
Angel investors specifically know and accept that start-ups are risky, so they need to be confident that investing in your business idea is worth the risk. So how do you reassure them?
In short, it sounds simple: investors want to know what the business does, why it exists, who is going to make it happen and what’s in it for them if they invest. So you need to be prepared to answer some specific questions, in detail, to justify why your idea deserves investment above all the others they’re looking into.
Here’s a general look at the minimum expectation of research and evidence you must have before approaching angel investors:
Just because your financial projections say that your business will make £5 million in 2 years, it doesn’t mean investors will invest. They want to know you have the right team and support around you. You need to show them that you and your team:
- know the industry, the market and the customers;
- can be trusted to properly manage and invest their funds to scale your business and deliver returns;
- have the skillset to properly execute your vision operationally.
Whether you’re a first time Founder or have prior experience, surround yourself with a team of experts and advisers that will plug any gaps across product, tech, finance and commercial.
2. “The problem and the solution”
It’s no surprise that you need to be able to explain to your customers what your product or service is, but angel investors typically look at investments from a problem / solution paradigm. This is one way they determine the strength of your value proposition.
You need to be able to demonstrate with absolute clarity what the exact problem is that you’re solving, and quantify the pain that your future customers are experiencing. The investor may not be familiar with the industry you’re focused on and its challenges, so here’s the chance to show your expertise in the area. You should be able to quantify this problem in plain language, with real industry examples and hard data. You want to be able to make the investor think “why has no one solved this problem yet?”. One of the main reasons investors pass on opportunities (although there are of course many) is because they simply don’t think the problem is big enough to make a lot of money from solving it.
Once an investor is clear that you’re looking to solve a legitimate problem, they will then want to understand how your product solves this. You need to clearly outline what your solution is and how your product will deliver it and how you can commercialise it.
This is the chance to demonstrate there’s a real demand for your business, a considerable market for it to capture and how lucrative it can be.
Investors often want to see a well-considered TAM, SAM and SOM, to make sure your business actually has a market to grow into and how much you can realistically capture. They want to know who are the key players in the market already to see who you’re up against.
Be realistic with your market numbers - stating the global market of people with mobile phones when you’re launching an app for a local community isn’t helpful for the investor and will imply you don’t truly understand your market.
4. Competitive advantage
Here’s your opportunity to show not just how and why your solution is better than any others out there, but also why it will continue to be better. Be prepared to explain what’s unique about your product or service; what’s the secret ingredient that will drive your growth?
Tip: being the first to market isn’t enough. Angel investors want to see how you will build defensible barriers to entry and leverage your competitive advantages to make sure you are a Founder who will succeed and is, therefore, worthy of their investment.
Traction shows you have or are on your way to achieving product-market fit. Traction is evidence, or what we call “validation” - it shows investors that customers experience the problem you’re trying to solve, and that they think your solution is a good way to solve it. The more validation, the more confidence you provide.
Having customers already using or even paying for your product is the ultimate sign of validation - but for pre-seed Founders, this isn’t always an option, so play the cards you have. Multiple metrics can be used here, both financial and non-financial and you could use smoke tests to prove traction in other ways.
Do you have good social media engagement? A waitlist? A newsletter? Have you got some very interesting user testing data? Have companies expressed an interest in working with you once you’ve built the product?
The ones to use and the expectations from investors will depend on your business model and stage of development. You must inspire confidence in angel investors that your core proposition is robust and can be improved with investment.
6. Business Model
Get ready to justify your valuation. This is the step where you need to demonstrate how value is going to be created and how your idea can be monetised.
Even if you are pre-revenue or don’t plan to monetise immediately, you must be able to explain how the business model will ultimately generate cash flow and value in the future.
Investors want to see you have a clear understanding of what income streams you will be targeting. Are they realistic? Have you considered how your costs will scale? You need more detail than just “We will sell ads when we have enough users”.
Fact: the one thing that is guaranteed to be right about a start-up’s 5-year forecast, is that it will be wrong. Pure and simple! That is to say, despite the most well-intentioned plans and forecasts, a start-up will grow, adapt, evolve and pivot hugely, especially in its formative years - the caveat here being that, once a start-up matures and has 2-3 years of revenue generation under its belt, the financial model will eventually become more stable.
Investors scrutinise start-up financial models because they need to see that the Founder has considered all of the financial and commercial implications of building and growing a business. Needless to say, these tie into the narrative presented so far.
They want to see that you have used realistic assumptions, that you have included the right things in your overheads and that your burn rate for the next 12-18 months will sustain you until the next round of investment. They want to trust that you can be trusted to put their investment to good use. You can be optimistic, but don’t be excessive otherwise investors won’t think you have credibility.
8. Investment proposition
It’s essential to show the investor that there is a clear plan of what you need, why you need funds, how these funds will be used and what the ROI for the investor will be.
You need to be able to show:
- How much you are raising;
- How you are going to spend it;
- First key milestones you will meet as a result of investing the funds (from a product and customer perspective);
- Potential exit opportunities down the road - highlight comparable companies and their exits in your sector.
As you can see, the most important thing you need to do before approaching angel investors is to prepare. You won’t know all the answers in the early stages because there are so many unknowns - and this is ok. However, making sure you are clear on the aspects of what you do understand and providing evidence through validation are key to providing investors confidence in you & your ideas investability. It complements the characteristics of a good Founder.
At Founder and Lightning, we don’t start designing products, let alone developing them, until we have a firm grasp of all of the above because our priority is to help save your valuable time and early Seed money by not making some of the common mistakes often made. Our Discovery process is designed to complement Founders’ knowledge and research, validating both the problem and the (MVP) solution with:
- Problem validation and solution exploration
- Market analysis
- Customer surveys and interviews
- User story mapping
- Low- or Hi-fidelity prototyping
- Usability testing
- Scope and feature prioritisation
- Tech feasibility review
- Go-to-Market (GTM) plan
- Time to Market (TTM) plan
- Estimated costs and timescales to bring your MVP solution to market
By reducing uncertainty around a problem or idea and making sure the right product is built for the right audience and market, you significantly improve your chances of, and the time it takes, finding your product-market fit. It's also a great exercise to help you prepare for investment, including the funding strategy you'll have to create, as you'll have all the information you'll need to back it up. This will increase investors' confidence that you and your business deserves their investment more than the opportunities they’re comparing it with.
Contact us today to get started on Discovery!