What makes a business interesting to angel investors? What do they look for in a business plan? I've been a member of Willamette Angels, a regional angel investment group, since 2009, and since 2005 I've been the judge of three major business plan competitions every year, so I review about 100 business plans a year for suitability for angel investment.
With that as background, here's what I believe angel investors want to see in your business, plus, what they want to see in your business plan.
Part 1: What Angels Want From Your Business
1. We want to believe your business has a big potential market, driven by a real market need and your solution. We call that "product-market mix." Don't just show us numbers, tell us a good story we can believe in, about needs and wants, people, problems and solutions. Don't tell us you've got the next Facebook or Amazon, or that your business is disruptive or a game changer—we'd rather absorb your story and decide that for ourselves. We won't just swallow your numbers whole; we'd much rather listen to your underlying story and decide for ourselves how big your market might be.
2. We want you to have a good team that can execute. Startups are a wild ride and we want you to have been through it before. We don't want you to learn what it takes on our dime. We also want you to have your team in place and ready to execute—although sometimes you can get away with missing one or two key people if you acknowledge those needs and show how you will fill them.
3. We want your business to be able to scale up to grow fast. By scale, we mean you show how you can increase sales enormously without needing a proportionate increase in fixed costs (such as locations, rent or equipment) and payroll. That means you probably sell a product, or a productized service or software as a service. Traditionally, products can scale and services can't. But these days, given web and mobile apps, and so many productized services, some service businesses scale very well. The critical point is often being able to multiply sales a lot faster than fixed costs and employees.
4. We want you to be able to defend your business against quick and powerful competition. We call that defensibility; the more traditional term is barriers to entry. It might be good patents, copyright, trade secrets or some other advantage, like unique product or market knowledge—or a combination of any of these. We've seen how easy it is for resourceful companies to get around patents and copyright and trademarks, so we know there's no simple answer, but at the very least we want you to be aware of the problem. We don't want to invest in your business only to see it swamped by powerful competitors.
Don't just show us numbers, tell us a good story we can believe in. Don't tell us that your business is a game changer—we'd rather absorb your story and decide that for ourselves.
5. We want you to promise us an exit. The exit is when you sell your company to a bigger company, or register its shares to be sold in a public stock market. We don't make money unless you give us a way to sell our share. You as entrepreneur and business owner might never want that, but we need it. Ironically, you growing your company to a happy healthy and financially independent state, if that means you don't want an exit, is not good for us.
Part 2: What Angels Want From Your Business Plan
We won't normally read your plan until later, after we've heard your pitch, and then only if we like the pitch. So you can assume your pitch told us the story, and your plan is to tell us how you'll make that story come true, step by step.
1. Give us strategy and tactics as simply as possible. We like lists, tables and bullet points more than text. Don't show off your knowledge, and don't convince us about the science. Just show us what you're going to do.
2. Include a credible sales forecast and unit economics. Don't do a sales forecast top down based on a small percentage of a big market. Instead, build it from the assumptions up, so you show how sales depend on web traffic, channels, downloads, pay-per-click, distributors or real traffic. And show how much it costs you to produce a single unit, and how much you sell that for.
3. Connect the dots. Make connections between projected sales, expenses, unit costs, marketing activities, investment in growth, responsibilities, tasks and performance metrics. Don't project unrealistically high profits.
4. Have specific milestones we can track. Commit yourself and your team to specific steps and progress.
5. Keep it short and practical. We expect you to keep your business plan short and practical so you can review it often and revise it as frequently as assumptions change. We want a fresh plan, no more than a few weeks old, at most.
And Now, the Bad News
Checking off everything on both lists doesn't mean you'll get investment. Missing any one of those five points in the first list means you probably won't. And having your plan match all five points in my second list won't guarantee an investment, just ease the process and avoid friction caused by an annoying plan. Angel investors invest in people and opportunities, not plans. A great team and opportunity with a mediocre plan will almost always do better than a mediocre team and opportunity with a good plan.
The information contained in this article is for generalized informational and educational purposes only and is not designed to substitute for, or replace, a professional opinion about any particular business or situation or judgment about the risks or appropriateness of any financial or business strategy or approach for any specific business or situation. THIS ARTICLE IS NOT A SUBSTITUTE FOR PROFESSIONAL ADVICE. The views and opinions expressed in authored articles on OPEN Forum represent the opinion of their author and do not necessarily represent the views, opinions and/or judgments of American Express Company or any of its affiliates, subsidiaries or divisions (including, without limitation, American Express OPEN). American Express makes no representation as to, and is not responsible for, the accuracy, timeliness, completeness or reliability of any opinion, advice or statement made in this article.
A version of this article was originally published on July 2, 2015.