What I’ve learned as a startup analyst for an angel investing syndicate

Today, I’m going to teach you what an angel investor is looking for in a startup opportunity.

The tips I am going to share come from my time as a 4 startup founder and as an angel investor myself. Plus time working as a startup analyst for an angel investor syndicate. All of that adds up to having the opportunity to have been involved in over $800,000,000 worth of deals. The truth is, it is probably over $1B by now, but I stopped counting.

As an individual angel investor, I am part of the Assure angel syndicate. I’ve also recently started working for my friend Eric Dobson, who runs the Sheltowee angel investor syndicate group. There I am using my financial background to perform the due diligence after a startup has been given a term sheet.

By the way, what many people inexperienced with startup investing don’t understand is that what you see on shows such as Shark Tank is just the beginning of the journey. Once a preliminary deal is agreed upon, whether verbally or via a term sheet, the investor will then perform additional rounds of due diligence. This includes gathering a litany of documentation from the startup.

What goes into a “Data Room”?

Experienced founders will already have a data room setup that they can share with interested investors. A data room is typically a cloud-based folder where the startup has saved all its investor-ready documentation.

That documentation often includes:

• Legal information such as the incorporation, or legal entity, documents for the startup, and the company's bylaws.
• The company’s current capitalization, or cap, table detailing who owns what amount of equity in the venture.
• Financial documentation such as past profit and loss or balance sheet statements. Also, a set of Pro-forma or financial projections detailing future anticipated performance.
• A detailed listing of all intellectual property. Including pending or issued patents, trademarks, and copyrights.
• Presentation material such as a pitch deck and business plan.

I advise most startups I work with to have all of this stored in a Google Drive folder that can easily be shared with a potential investor.

What Angel Investors are looking for

Now let’s look at what each set of documents helps the investor learn about your business.

Legal

• Who are the owners?
• Who makes up the Board of Directors?
• Who has the authority to bind or execute a legal contract on behalf of the company?
• Whether or not the company can borrow money and if so, who has to approve it

Cap Table

This also tells the investor who the individual owners are. But it goes deeper into the percentage of the company that each investor has. When an investor looks at a cap table, they are also looking for other information. Such as:

• Are there other investors already involved? If so, are they well-known investors? This can be a good signal for the investor.
• Does one individual or a small group of closely-related individuals own a controlling share of equity? Here you have to reference the legal documents to see how controlling interest was defined.
• What percentage of equity each investor has? This helps point to past valuations, which are used to establish the current valuation.

Financials

• Past profit and loss statements are used to evaluate:
• Is the company profitable?
• What is its current burn rate? (monthly spend)
• Where is it spending its money? Does it go more into research and development or marketing? Or, does it being frivolously spent
• Balance sheet
• What assets does the company have?
• What are its liabilities? Here past borrowing will show up.
• How much equity has been built up for the shareholders?
• Proforma
• How does the company anticipate performing in the future?
• What assumptions were made to build the proforma? Are they realistic assumptions?

One quick note on the above point. This week, I reviewed a startup that Sheltowee is considering investing in. It is an interesting idea with strong intellectual property in place. But, their proforma was not done well. The company is projecting growth from a few hundred thousand in revenue this year to almost half a billion dollars in three years. A set of realistic proforma is by far one of the places that most startups miss the mark.

I get it. Establishing a strong set of projections can be hard to do. If you don’t feel capable of doing this alone, consider hiring a professional. I often recommend founders work with Adam at ProjectionHub.

Intellectual Property

• Does the company have patentable solutions? This creates a moat of defensibility around the company’s products or services. Making it harder for new entrants to compete against the startup.
• Are those patents issued or pending? Pending patents are not nearly as strong as those that are already issued.
• What trademarks are in place? Trademarks are often used in branding, which can help with marketing and sales.
• What copyrights exist? Copyrights are often used in protecting software solutions.

Presentation documents

• The pitch deck and business plan help investors fill in the rest of the information gaps. For example:
• Information about the leadership team.
• How much $ is the startup seeking, and what are they willing to give up in exchange? Are they raising under a SAFE or some other funding structure?
• How they plan to go to market.

Go-to-market strategies are another place I have noticed startups missing the mark. Most put little thought into taking their product or service to the market. For example, a classic mistake I see is when a startup assumes it can leverage social media by going viral. That isn’t a strategy. It's a wish and a prayer.

• Who the main competitors are, and how entrenched are they in the market?
• How the company established its pricing structure and how that compares to competitors.
• What distribution channels will be used to deliver the solution to the market?
• Are there any existing strategic partnerships in place?

As a startup founder, if your data room is in good enough shape that an angel investor can get good answers to the above questions, then you are in better shape than most I have seen.

To wrap up, I have two resources available for you.

• If you’d like more information about what investors look for in a startup, click the button below.

• If you are interested in or already are an angel investor and you’d like the template I use for evaluating my own startup investment opportunities, click the button below.