7 Things Angel Investors Look For In A Startup Before Investing (And Why Its Important).
Great ideas don’t change the world. Great ideas implemented well do change the world.
However, I’d rather have an average idea implemented well than a great idea poorly executed.
This is the thin line all businesses must find if they are to compete, stay relevant and ahead of the curve.
In recent months, we have seen a lot of startups bag millions of dollars from investors to go implement some great ideas and not-so-great ideas (not in a derogatory way).
Nigerian Startups alone have raised over $300 million dollars in 2019.
Leading the pack is Opay with $170 million, Andela with 181 million, Kobo 360 with $37.3 million, Migo with $ 37.2 million, Flutterwave with $55.4 million and the list goes on and on.
The seasoned entrepreneur understands the need for leverage in business, and when I say leverage I mean Other People’s Time (OPT), Other People’s Money (OPM), Other People’s Effort (OPE), Other People’s Resources (OPR) etc.
If you don’t have leverage you can’t get very far in business, and that is a stone-cold fact, it’s like trying to surf against the current.
You’ll simply wear yourself out.
So don’t even think about it…
Needless to say, of all the forms of leverage you can have in a business, the necessity for one stands out the most and that is Other People’s Money (OPM).
What makes an investor believe in your idea and get comfortable enough to give you millions of dollars to go implement that idea?
Let’s find out…
Now, this is not the holy grail, there might be other determining factors but if you get all these right you’re definitely well on your way to a good start with any investor.
So, let’s get started…
- The Idea
Ideas are a dime a dozen. In other words, they are dirt cheap. I can bet you that if you sit still and are very open-minded you’d probably get an idea that you might think could be a business.
But, can all ideas be turned into a business? Definitely not.
What makes an idea a viable business is timing, and sometimes the owner of an idea can be so way ahead of the curve that demand is almost non-existent or behind the curve that its life is slowly oozing out.
The difference between a great idea and a not-so-great idea is the leverage it takes advantage of.
Look at it this way, some ideas are little pieces of a jigsaw puzzle that need to come together to make the big picture clearer. In other words, other elements need to be in place to make it come to life.
Take for instance the Airbnb and Uber idea.
Airbnb is an online marketplace for listing properties for homestay or tourism experience.
Uber is a ride-hailing company that offers peer-to-peer, ride-sharing, ride service hailing, food delivery services around the world.
Hotels and Taxis already existed, so if the founders came up with the idea to be another hotel or taxi company it would have been playing in a highly competitive space.
The secret to great idea is in the leverage; Taking what already exists and plugging the idea into it.
Airbnb has raised a total of $4.8billion from investors since it launched back in 2008 and have been valued at $35billion, Uber, on the other hand, has raised about $20 billion since it launched in 2009 and has been valued at $70billion.
Airbnb doesn’t own the properties listed on their platform and neither does Uber own any car on their platform, they simply connect those who do with those who want it.
And that my friend is a leveraged idea.
- The Opportunity
Opportunity without timing is not an opportunity. Business is very dynamic as a result of the continuous evolving human needs and behavior and thus there is always a window of opportunity presented to the observant entrepreneur.
As a matter of fact, you’re not an entrepreneur because you have an idea, you are an entrepreneur because you can spot an opportunity that matches your idea.
Without an opportunity, no idea can come to maturity.
Any investor would want to know what opportunity you are capitalizing on and this is what the pitch deck your present must capture.
A good example is Amazon.
Jeff Bezos was a hedge fund executive before he quit to start Amazon back in 1994, Amazon started out as an online bookstore because Jeff Bezos had read a report forecasting the rapid growth rate of the internet at 2300% per year.
This was the perfect opportunity for Amazon and Jeff hopped right in and raised about $1 million dollars between 20 to 22 early investors who put in an average of $50,000 each.
Keep in mind that it wasn’t so much about the idea of starting an online bookstore that made Amazon what it is (there were other online bookstores as well), but the opportunity that Jeff Bezos saw and ran with.
Today Amazon is among the trillion-dollar companies because of the opportunity.
- The Business Model
Your idea might be great and no doubt it might have the perfect opportunity to match it but without a complementary business model it could still crash. The business model clearly defines the pathway to revenue.
Business models evolve over time-based on the customer’s interaction and it sheds light on the sustainability of the idea over a period in time.
According to Harvard Business Review, there are about 19 tested and proven business models that you can adapt to your business, or have a combination of several.
Take for instance any social media platform YouTube, LinkedIn or Facebook.
They all use a combination of several business models, let’s take a look at a few
- Crowdsourcing: Get a large number of people to contribute content for free and engage with other people’s content.
- Freemium: Offer basic services for free and charge for premium service.
Now think about it for a moment, without millions of people contributing content on these social media platforms they wouldn’t be what they are today.
Without active users engaging on these platforms for FREE, they can’t sell advertising which is their major revenue stream.
Now take a look at this…
- LinkedIn has 250million monthly active users
- YouTube has 2 billion monthly active users
- Facebook has 2.45 billion monthly active users
- Twitter has 330 million monthly active users
- Instagram has 1 billion monthly active users
Now this gives you an idea on the number of contributors on this platform which is on the front side (crowdsourcing), but let’s take a look at the revenue side (freemium).
- LinkedIn’s revenue was at $6.8 billion
- YouTube’s revenue was at $15 billion
- Facebook’s revenue was at $70.7billion
- Twitter’s revenue was at $3.46 billion
- Instagram’s revenue was at $20 billion
Most of the revenue came from paid advertising…I guess you get the picture about the importance of a business model.
This is why an investor pays attention to the business model of every startup.
- The Team
Knowing where you are going is one thing but knowing who you are going with is the difference between a 40-day journey and a 40-year journey.
The team behind an idea is very crucial to the successful execution of that idea and without a great team your idea, the opportunity, and the business model would not mean much.
In other words, before an investor can be sold on your idea and everything else each team player must be fully convinced and sold out on the viability of the idea as nothing can be quite frustrating as a team that doesn’t see eye-to-eye on the vision.
That being said you definitely don’t want sycophants as teammates, but seasoned entrepreneurs you need a competent ally that will complement your weakness with their strength.
The first year in business is a crucial and defining time for any business and you don’t want to have to run an adult day-care center and allow the business to suffer.
There’s a reason you find most of the fortune 500 companies have a founder and co-founder.
- For Microsoft, you have Bill Gates and Paul Allen
- For Apple, you have Steve Jobs and Steve Wozniak
- For Google, you have Larry Page and Sergey Brin
- For Facebook, you have Mark Zuckerberg, Andrew McCollum, Dustin Moskovitz, Eduardo Saverin, and Chris Hudges.
- For Uber, you have Travis Kalanick and Garret Camp
If the team in any of these companies not in sync at the early stages they definitely won’t be where they are today as a company.
Long story short, two can’t work together except they agree.
- The Process/System
Without a process or system in place you can’t scale the business, and if you can’t scale then you probably shouldn’t have started out otherwise you’ll be like a sitting duck in the cross-hair of your competitors.
Having a good system ensures that all aspects of the business work in harmony towards the ultimate goal. It allows predictability, accountability and most of all it guarantees growth.
And investors want to see growth.
In most cases, an average idea with an extraordinary system does way better in terms of profitability and scalability than having a great idea.
The best case study that fits perfectly well is that of Mcdonalds.
No doubt Mcdonalds was not the first fast-food restaurant selling hamburgers but what made Mcdonalds stand out was the methodical system that allowed them to churn out burgers and fries in record time and this ingredient was the breakthrough that made it what it is today.
Sometimes the idea isn’t always the idea, as in the case of Mcdonalds the secret sauce was in the system.
- The Product/ Service
There is always going to be some form of competition in whatever niche you choose to pitch your tent and thus differentiation is of utmost importance.
- What product or service are you bringing to the marketplace?
- What makes it different from every other product or service in its category?
- Why would your ideal customer choose it over every other alternative?
These are very salient questions you must answer first not based on what you think but on what the customer needs.
On one part, there is what the product/service delivers and on the other part there is what it represents to your ideal customer and this is why one product is priced higher than the other even though they are in the same category.
It’s not just about the product/service but the narrative behind it and what it represents to the customer.
A good example is with Rolls-Royce.
If the practical value of the car is what is being sold then the price should not be so higher. After all, if it’s all about moving from Point A to Point B any or every other car can do just fine.
But the intrinsic value of the Roll-Royce is in the class it puts its ideal buyer in and therefore its price is justified.
To sum it up, sometimes the real product/service you’re selling transcends the actual product itself.
- The Strategy
It makes no sense to go to war without a winning strategy. If you’re going to fight you might as well plan to win.
And if you’re going to launch a business you might as well have a plan to stay relevant to your customers not just in the short term but long term too.
Your strategy and business model go hand-in-hand, in other words, your strategy is what brings life to your business model. Your strategy needs to be dynamic enough to meet the customer’s needs.
Thus, your strategy needs to evolve because of the constantly changing consumer behaviour. What might be important to a customer today might not be that important next week.
The best example I can think of is Dominos Pizza.
In the early years, Dominos came up with a very great strategy and that was to guaranty pizza delivery in 30mins or less or its FREE on the 31st minute.
Boy…did it work? It worked brilliantly.
The strategy was not built on being the best pizza but on the speed of delivery and that was more important to the customer than anything else.
So, what’s your strategy?