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ANGEL INVESTORS

Know Your Angels

Angel investors frequently regret the investments they make. Here's what they're looking for.
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Just as their name implies, angel investors can come to the rescue of early-stage business ventures by supplying much-needed cash.

And some research indicates that angel-funded businesses are likelier to be successful in the long run. Generally speaking, businesses that get angel financing are better-run and often have higher revenues than their unfunded competitors.

What, then, do angels want from the entrepreneurs they invest in, and what do small businesses flub the most in their relationships with these essential sources of cash? 

Angel Survey Results 

Worthworm, a Phoenix, Arizona business that provides an online company-valuation tool (also called Worthworm), set out to find some answers in its 2014 Angel Investment Outlook report, released this week. It queried 100 angel investors in July.

The survey revealed that more than 40 percent of the angel investors regret at least one investment decision they've made, and that the top reason nearly half of the angels regretted making an investment was the overly optimistic financial projections of the entrepreneur. Angels also regretted investing because they later learned the startup had the wrong management team in place.

It also ticks angels off when entrepreneurs give them an unrealistically high pre-money valuation, flawed competitive analysis, and an inadequate marketing and sales plan.

What Angels Want

Now that you know a little bit about what rankles angel investors, you should know more about what they want out of their investment. More than a third are looking to diversify their investment portfolios by financing your company. About one-third are looking for a potentially high return on their angel investment. About 20 percent cited other reasons, such as wanting to be associated with the excitement of a startup or to support the U.S. economy.

In addition to sound financial projections and evidence of good management, here are a few other things they really want to see from you, according to the survey: A sustainable and competitive advantage, relevant experience in the founders, and multiple revenue streams.

About 40 percent of angel investors make just one investment annually, though roughly a third make five or more, according to the survey. More than a quarter plan to increase the number and dollar amount of  the investments they make in 2014. They cite improvements in the economy as the chief reason for the increases, as well as a more qualified pool of ventures.

Hot Sectors 

Angels invested $23 billion in close to 70,000 ventures in 2012, according to the most recent full-year data from the Center for Venture Research.

Mobile, Internet and health care companies will attract most angel attention going forward. And within mobile, payments and social networking are the chief areas of interest, the report says.


IMAGE: Joao Estevao Andrade de Freitas/Wikimedia
Last updated: Nov 22, 2013

JEREMY QUITTNER | Staff Writer | Staff Writer, Inc. and Inc.com

Jeremy Quittner is a staff writer for Inc. magazine and Inc.com. He previously covered technology for American Banker and entrepreneurship for BusinessWeek.




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