What Angels and VCs Look For When Investing Their Dollars

Angel investors and Venture Capitalists (VCs) generally look to invest in businesses that show at least two years of profitability. An angel, an accredited investor with a net worth of at least $1 million, usually seeks an average return on equity of 10 to 15 percent above the S&P 500 and will invest anywhere from $20,000 to $100,000 or more on a business venture. Of the two, an angel is more likely to invest in a startup and can play a vital role in bringing a business to a venture-backable stage.

VCs tend to invest more than angels - at least $1 million or more - and VCs are known to focus on high growth, high risk companies with stable revenues. VCs typically expect a 20 to 50 percent annual return on their investment upon exit. The expectation is that the business will go public within an average of five years and provide a solid return on the VCs' investment. Angels as well usually want their money back by the fifth year of operation of the business.

Angels and VCs may have other expectations. They will attend your shareholder and board meetings and may insist on majority control of your company's board depending on their level of ownership. They may also take a big bite of equity. Once you decide that bringing in outside capital is worth diluting your ownership, it is time to prime your management team.

The Single Most Important Element: The Strength of the Management Team
Besides looking for profitability, growth potential and a credible business idea and plan, the single most important element angels and VCs look for is a solid management team - a team that is bright, creative and includes leaders in the industry. This management team must be perceived as flexible enough to grow and change with the business. If the management team is lacking, the angel or VC may offer to help you build your team to an appropriate level of strength.

Your initial management team should include people with the ability not only to get the job done but who know how to pitch the story to angels and VCs. Everyone on the team should know your business strategy, technology, market, competition and financial goals, and everyone should tell the same story or pitch. Your management team should be composed of individuals with expertise in operations, finance, technology and marketing. The business may be yet unproven, but the management team cannot be.

Accept that your management team may change. Investors expect that you will set aside stock to hire the top notch leaders your company will need to grow. Another factor is that personal investment in the business by the management team demonstrates commitment and investors look on this favorably. Listen to your investors. Their interests and yours are fundamentally aligned. Angels and VCs bring substantial value as partners in your enterprise. 

Marsha Firestone, Ph.D., President and Founder of Women Presidents’ Organization (WPO)
Copyright 2008. All Rights Reserved.



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