What angel investors look for in tech start-ups
Wednesday 17th April 2019
Securing investment is a vital part of any technology start-up’s growth and can make or break the path to scaling up. Ryan Gracey, head of technology at Gordons law firm, explains what angel investors are looking in tech and media companies.
Technology start-ups continue to be an attractive option for investors. The UK technology sector received £6.1bn in venture capital investment and accounted for more than a third of sales, initial public offerings and mergers across Europe during 2018, according to Tech Nation and Dealroom.
This kind of interest also rings true for smaller start-ups looking to secure funding from angel investors. But getting your pitch right and avoiding pitfalls isn’t an easy process, and it often comes down to entrepreneurs not understanding what investors want. Here I’ve set out the key factors that angel investors are looking for in tech start-ups.
The A Team
Investors understandably put huge emphasis on the people at the heart of the business and how they complement each other. The start-up company’s founding team will define its future and make crucial decisions on its direction.
What investors are primarily looking for is a powerful combination of technical and business-oriented cofounders. If your people are too technical, investors worry they may end up down a rabbit hole of tech jargon without any focus on the bottom line. It’s not about the size of your team, it’s about having people who are knowledgeable, trustworthy and complementary who can lead the business.
A solid business plan
Investors need to see a business plan that is convincing, which sets out the overall vision of the company and dives down into the detail of how it is going to get there.
Reports have suggested that somewhere between a quarter and a third of SMEs are operating without a business plan, according to Barclays and Close Brothers Asset Finance respectively.
For tech start-ups seeking investment, a business plan is an absolute requirement. There is no ‘one size fits all’ approach for business plans, but I’d say you need to define the problem being solved by your company, explain your business model and set out how you intend to compete with others in the marketplace.
Investors ultimately want to see clear financial projections for the business in the coming years, so establish what milestones you are looking to hit. They’ll also be considering their own exit strategy later in the business lifecycle, so they need an idea of what the future looks like. This brings me on to another pet hate of angel investors…
A common pitfall when valuing a tech start-up is that companies sometimes pluck numbers out of thin air. I’m sure you have seen naïve founders pitching in the BBC TV series, Dragons’ Den, offering a small stake for a sizeable investment. Essentially they are woefully overestimating the value of their company. Nothing will kill a pitch faster or more conclusively.
As most investors are so-called ‘economic investors’ looking for a financial return, numbers are everything. The valuation that start-ups choose affects how attractive they are to investors. Again, there isn’t one metric to value a company, but it links back to your business plan – knowing your business model and financial plan means you’ll know the value proposition you can command from investors. If you’re unsure, seek advice from professionals.
A proven prototype
Often when entrepreneurs are seeking angel investment, they only have a working prototype. Investors are often happy to judge a product or service based on these early stages, but this makes it all the more important to support your prototype with workable metrics, showing that it has been tested with customers and can stand up against the competition.
What drives investment most is start-ups that show promise of becoming large companies with a significant ROI. Of course, not every tech start-up aims to become a unicorn, and some investors are happy with this, which leads on to a crucial element of the investor/entrepreneur relationship.
There has to be chemistry for entrepreneurs and investors to work well together, and serial investors know this better than start-ups themselves. They’ll be looking at these softer, cultural factors when making investment decisions.
A useful rule of thumb as a start-up is to identify which type of investor you are pitching to. In my experience, they come into three broad personas.
Firstly, the ‘economic’ investor already mentioned is driven by ROI and focused on the numbers. Secondly, the ‘hedonistic’ investor is one who gets a kick out of the technology itself and is excited and passionate about bringing it to market. Finally, the ‘altruistic’ investor is motivated by helping society through tech for good, for example healthcare or environmental tech.
Ask yourself first which investor personas you want for your business, then pitch your proposal based on their motivations. Disconnects between investors and entrepreneurs often come from a culture clash.
Make connections: Renephra case study
A final piece of advice for tech start-ups is to seek out support from the many not-for-profit organisations out there. We are partners with investment platform NorthInvest which is backed by the Northern Powerhouse and aims to identify, connect and develop early-stage tech start-ups throughout the north of England.
In December, NorthInvest helped Manchester-based medical technology company Renephra secure a six-figure investment. The company is a spin-out from the University of Manchester and Manchester Foundation Trust, pioneering the treatment of chronic fluid overload and Lymphoedema in advanced heart failure, a debilitating condition that affects over 30,000 people in the UK alone.
This is an inspiring example of how entrepreneurs can find angel investors. The investment has fundamentally changed the course of the start-up, given the investor a reliable outlet for funds and the partnership itself promises to make an impressive impact on the wider marketplace.