Understanding the Red Flags That Can Cause Investors to Think Twice Before Backing Your Business. #AngelInvestors #StartupFunding #DealBreakers
Securing funding from angel investors is crucial for many early-stage startups. Angel investors are an essential element of the overall startup ecosystem. For many success stories, a few good men and/or women willing to invest in them, and guide them, was just what they needed to help get to the next step. Angel investors often invest their own money in startups.
They are the ones who see something big even before the rest of the investor community does. Even before the VCs and Hedge fund dudes get in on the ection - whatever the "action" may be, Angels help entrepreneurs like you and me take the first proverbial baby steps.
According to the Angel Capital Association (ACA), angel investors in the United States fund approximately 30,000 to 40,000 startups annually (ACA, 2021). Considering that around 500,000 new businesses are launched each year in the U.S. (U.S. Small Business Administration, 2021), it can be estimated that angel investors fund roughly 6% to 8% of new startups annually.
That being said, certain factors can deter investors from backing your venture. This article explores five key reasons that can cause angel investors to walk away from your deal, supported by relevant statistical data.
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We need a plan...a real plan.
A well-crafted business plan is essential for convincing angel investors of your startup's potential. According to a study by Palo Alto Software, companies with a formal business plan have a 16% higher likelihood of achieving viability (Inc., 2016). An incomplete or poorly executed plan can signal a lack of preparedness and deter investors from supporting your venture.
Know your worth.
Overvaluing your startup can be a major turnoff for angel investors. Research shows that 65% of startups fail due to issues related to valuation and pricing (CB Insights, 2019). Presenting a realistic valuation, based on market comparables and growth potential, is crucial to attracting investors and avoiding misunderstandings.
The right team
The strength of your management team plays a significant role in securing funding. In fact, 23% of angel investors cite a strong management team as their primary motivation for investing in a startup (Forbes, 2015). A weak or inexperienced team may raise doubts about your startup's ability to execute its vision and achieve long-term success.
What are your sales?
Market traction is a key indicator of your startup's potential for growth. A study by Startup Genome found that 42% of startups fail due to a lack of market need (Fortune, 2014). Demonstrating initial market traction, such as customer testimonials, user growth, or revenue, can help validate your business concept and attract angel investors.
How will I get my money back?
Angel investors typically seek returns on their investments through an exit, such as an IPO or acquisition. A survey by the Angel Capital Association found that 54% of angel investors consider a well-defined exit strategy to be a critical factor in their investment decision (ACA, 2020). A vague or unrealistic exit plan may cause investors to question your startup's potential for providing a return on their investment.
By understanding the factors that can drive angel investors away from your deal, you can better position your startup for success.
Ensuring a solid business plan, realistic valuation, strong management team, market traction, and a clear exit strategy will help improve your chances of securing funding and support from angel investors.
