When Angel Investors Says No
Viewed: 16261 Times

Angel investors are the best source of funding for early-stage businesses and even though they review thousands of financing applications every year, only a small percentage of enterprises will actually receive their needed capital. Known for their high-risk deals, there are a few rules that may influence an angel investor’s decision in rejecting an investment opportunity. Here are some of them.

Rule no. 1- Trust intuition
Most experienced angel investors will use their instinct when deciding on a particular investment. They are influenced mostly by factors such as credibility of the proposed business plan, the entrepreneur’s presentation, due diligence findings, etc. If an angel investor experiences any doubt regarding a particular investment, they will simply reject the application.

Rule no. 2- Avoid underfunding
Often times, entrepreneurs have the tendency to underestimate the costs needed for their businesses and request an extraordinarily “small” amount of capital from investors. While the process of writing a check is a simple one, it can never compare to the difficulties associated with making the expected monetary return. Angels are well aware most of these “underfunded” companies will eventually generate very little or no return. The under funded company will most likely seek additional funding to compensate for their losses, and angels tend to stay away from companies that may require these follow-on investments. In their eyes, an underfunded company is worse than providing no funding at all.

Rule no. 3- Always underestimate an entrepreneur’s credibility
Entrepreneurs also have the tendency to assure their investors their company will be successful, despite its failure in the end. It is crucial that business owners demonstrate their company will succeed in both the short and long run by working out every conceivable aspect that may happen during the investment span. In addition, a strong management team should also be implemented.  These members should be knowledgeable about the short and long-term goals. Angels should always underestimate an entrepreneur’s credibility until they have demonstrated competence.

Rule no. 4- Angel teamwork advantage
While most angels are able to work alone and have the knowledge and skills to make sizeable investments with confidence, others may often work in groups, where their investments are highly influential upon what other angels invest in. Their conformist ways may be beneficial because when angels work together, they are able to learn and process opportunities faster than when working alone.  

Rule no.5- The importance of rule-making
Most experienced angels will abide by certain rules they make when investing. They are keen on how much they can invest in each year, which industry sectors to focus on, and the amount of expected return. Regardless of how fantastic an entrepreneur’s pitch is or how promising an investment may appear angels should always avoid temptation and abide to their set rules and perspectives.

Rule no. 6- Experience
Most angel investors were once entrepreneurs themselves, and the best indicator of their success is their previous success. An experienced angel has detailed knowledge on how to start, run, and sell a company as well as experience with learning from past mistakes. An angel investor will typically select investments according to their area of expertise and avoid investments that were proven to be unsuccessful before.

There are certain characteristics that make an investment opportunity appealing to angel investors, including a well-trained, experienced management team, the size and timing of the market, and the unique quality of goods and services a company offers. As simple as these requirements may be, the majority of funding requests made by entrepreneurs will be rejected. Angels can protect their money simply by employing six different rules to avoid investment mistakes.

 Digg It    Stumble It

Related Articles