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Make Sure Your Startup Domain is Investor Friendly

 

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We are talking about angel investors here, meaning people who invest their own money in early-stage startups for a share of the equity. These people are highly focused on investment areas they know, which have a large opportunity for growth, revenue projection of $20 million or more in five years and a high return that can be realized via an exit within five years.

Generally, the same criteria apply to venture capital investors, although they invest other people’s money at a later stage in larger amounts. Both are excited by innovative new products and services, and neither is normally interested in deals in the following domains:

  • Consulting services. This type of business is usually based on the expert skill and reputation of an individual or small group. Such business shouldn’t need a large investment to get started (no product to develop), and it probably won’t scale quickly (limited supply of experts). Accordingly, investors will decline.
  • Restaurants and retail. Local and family businesses, such as cafes and retail shops, are also not investments angels tend to consider unless you are proposing a new national franchise. Otherwise, these will not scale and cannot show a growth and return rate to excite professional investors.
  • Gambling and porn sites. Most professional investors value their integrity and image so much that they would never consider investing in a business that might be offensive to many or raise legality questions in the minds of business associates and future clients. This is definitely the space for bootstrapping and personal networking.
  • Real estate. Angel groups almost never supply financing for real estate purchases or personal loans. Even in today’s market, there is capital available from financial institutions at a lower cost for these purposes. It doesn’t make financial sense to give up equity ownership on an asset purchase with built-in collateral.
  • Non-profit businesses. I think investments in non-profits are called “contributions.” In fact, many angel investors are also philanthropists, but the process of finding them and working with them in this context is totally different from the angel investment process. It’s hard to promise a high financial return from a non-profit.

Be wary of brokers who claim they can find angels in these domains for an up-front fee and a percentage of the investment. In general, you shouldn’t be paying a fee to have someone evaluate your investment opportunity or “guarantee” to find you investors. I recommend going only with legitimate angel groups, accessible through national websites such as Gust or locally publicized organizations.

Even if you are in the right domain, you should remember that angels invest in people more than ideas or specific business ideas. They put high premium on entrepreneurs who are experienced in building a business and experienced in the domain of their current proposal. First-time founders will find that most angels turn into mirages.

Entrepreneurs in an unfamiliar domain better find a partner who has been there before they apply for funding. Early-stage these days means early customer revenue received and early product in the market. If you have no product, no customers and no revenue, talk to friends and family for that initial funding.

So if your domain is among the ones outlined above, you probably won’t find any angels lurking. That doesn’t mean you should give up your dream. It just means you have to take a harder look at the other alternatives listed in my earlier article on “The 10 Best Sources of Cash to Start Your Business” for startups. A real entrepreneur loves a little challenge to be the shining light in the crowd.

Reprinted by permission.

Image credit: CC by Terry Shuck

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About the author: Martin Zwilling

Martin is the CEO & Founder of Startup Professionals, Inc., a consultancy focused on assisting entrepreneurs with mentoring, business strategy and planning, and networking.

Martin for years has provided entrepreneurs with first-hand advice, mentoring and business plan assistance as a startup consultant. He has a unique combination of business and high-tech experience, and executive mentoring and connecting startups with potential investors, board members, and service providers.

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