It is estimated that up to 80% of startups do not reach their fifth anniversary. In the case of Uganda, 50% of businesses do not reach their third anniversary.
Various reasons are cited for a startup’s failure including a lack of capital or cash to burn. Therefore, to this end, it is very important that a startup is able to attract capital or investors early.
While as an investment in startups includes family and friends who may invest because of emotional and social support reasons, there's a need to attract the next type of investors, Angel Investors, who are the bridge to Venture Capital investors and are usually the first experience a startup gets of financial investors.
For Angel investors, investing in a startup is driven by the need to make a financial return over and above any social and emotional reasons. Therefore, the aim of identifying suitable startups to invest in for angel investors is to pick those with the greatest chance of success.
What, then, do Angel Investors look out for and what should startups demonstrate to increase their chances of success and thus become more attractive to Angel investor funding?
The Idea
It is important that there is a clear demonstration of the pain point being addressed by the Startup. Is there a clear need and more importantly is the idea scalable?
Generally, Angel Investors will look more favorably on an idea that creates a new market and or provides a new way of solving a problem or taps into a very large unfulfilled need as opposed to an idea that tries to steal market share from existing players.
Product /Market Fit
For the startup with a product or solution addressing a need, is there a clear product market fit? Has this been found? Product/market fit simply means being in a good market with a product that can satisfy that market.
An Angel Investor looks for a startup that is able to demonstrate product/market fit quickly! This is seen as the first step to building a successful venture in which the startup or a company meets early adopters, gathers feedback and gauges interest in its product(s).
Founder Focus, Passion and Tenacity
While anyone can think of an idea, does the entrepreneur have the passion and tenacity to see this idea through to the end? Entrepreneurship can be a lonely journey and one will face a lot of obstacles as they try to show the whole world their amazing product and why it is the next best thing.
Angel Investors look out for startup founders that demonstrate resolute focus and determination every day to break through barriers and challenges in pursuit of the goal and furthering their idea.
Team Alignment and Fit
In the world of startups, Angel Investors would rather a grade B idea with a grade A team than a grade A idea with a grade B team.
More importantly, is the team executing on the idea a good fit? Are they aligned in their interests and objectives? Angel investor shall look at the skill sets within the team, look for levels of commitment within the team and if the possible clear contractual alignment of objectives.
For example, as demonstrated in shareholder agreements or a memorandum of understanding with clear roles, responsibilities, and milestones for each member of the team. It is advisable to have an Advisory Board in addition to the team executing on the idea.
Team excellence in execution
After the startup has chosen their idea and is clear for whom they are solving what problem, also known as a value proposition, Angel Investors will look out for excellence in delivery as a team towards this value proposition.
While ideas for startups may not be unique, to ensure success, startups should have identified a clear need or problem that their idea solves that is sustainable. To do this shall require a quick understanding and demonstration of the product market.
For the vision that the entrepreneur has to be realized shall require passion and tenacity on the part of the Founder who shall need to demonstrate character and strength of mind to take their idea/business forward.
To improve the chances of success and the ability to execute on the idea, there is a need for a team that is aligned with their objectives and includes the diversity of skills.
Kenneth Legesi is a Management Consultant and Corporate Finance Advisor. He is also passionate about catalysing financing for startups and SMEs in Africa.