Angel investors are the best source of funding for early-stage businesses and even
though they review thousands of financing applications every year, only a small
percentage of enterprises will actually receive their needed capital. Known for
their high-risk deals, there are a few rules that may influence an angel investor’s
decision in rejecting an investment opportunity. Here are some of them.
Rule no. 1- Trust intuition
Most experienced angel investors will use their instinct when deciding
on a particular investment. They are influenced mostly by factors such as credibility
of the proposed business plan, the entrepreneur’s presentation, due diligence
findings, etc. If an angel investor experiences any doubt regarding a particular
investment, they will simply reject the application.
Rule no. 2- Avoid underfunding
Often times, entrepreneurs have the tendency to underestimate the costs
needed for their businesses and request an extraordinarily “small” amount
of capital from investors. While the process of writing a check is a simple one,
it can never compare to the difficulties associated with making the expected monetary
return. Angels are well aware most of these “underfunded” companies
will eventually generate very little or no return. The under funded company will
most likely seek additional funding to compensate for their losses, and angels tend
to stay away from companies that may require these follow-on investments. In their
eyes, an underfunded company is worse than providing no funding at all.
Rule no. 3- Always underestimate an entrepreneur’s credibility
Entrepreneurs also have the tendency to assure their investors their company
will be successful, despite its failure in the end. It is crucial that business
owners demonstrate their company will succeed in both the short and long run by
working out every conceivable aspect that may happen during the investment span.
In addition, a strong management team should also be implemented. These members
should be knowledgeable about the short and long-term goals. Angels should always
underestimate an entrepreneur’s credibility until they have demonstrated competence.
Rule no. 4- Angel teamwork advantage
While most angels are able to work alone and have the knowledge and skills
to make sizeable investments with confidence, others may often work in groups, where
their investments are highly influential upon what other angels invest in. Their
conformist ways may be beneficial because when angels work together, they are able
to learn and process opportunities faster than when working alone.
Rule no.5- The importance of rule-making
Most experienced angels will abide by certain rules they make when investing.
They are keen on how much they can invest in each year, which industry sectors to
focus on, and the amount of expected return. Regardless of how fantastic an entrepreneur’s
pitch is or how promising an investment may appear angels should always avoid temptation
and abide to their set rules and perspectives.
Rule no. 6- Experience
Most angel investors were once entrepreneurs themselves, and the best indicator
of their success is their previous success. An experienced angel has detailed knowledge
on how to start, run, and sell a company as well as experience with learning from
past mistakes. An angel investor will typically select investments according to
their area of expertise and avoid investments that were proven to be unsuccessful
There are certain characteristics that make an investment opportunity appealing
to angel investors, including a well-trained, experienced management team, the size
and timing of the market, and the unique quality of goods and services a company
offers. As simple as these requirements may be, the majority of funding requests
made by entrepreneurs will be rejected. Angels can protect their money simply by
employing six different rules to avoid investment mistakes.