Why Angel Investors Don’t Invest in Your Startup
Navigate these pitfalls to avoid the dreaded “No”
Have you pitched angel investors and walked away without a check? Or heard stories from founder friends on unsuccessful angel rounds? It’s hard to always pinpoint why angels do (or don’t) make investments in startups, but oftentimes the reasoning comes down to a few simple explanations.
Many entrepreneurs seek capital (other than their own funds) at some point during the life cycle of their business. Where capital is sourced often depends on the industry and maturity of the business. Various sources of capital include grants, friends & family, angel investors and venture capital. Typically founders will seek capital from angel investors once they’ve reached some level of market validation and are ready to scale.
As you navigate your own fundraising efforts, I’ve comprised a list of top reasons angels may say ‘no’ to investing in your company.
No personal connection. I’m sure you’ve heard the saying “Bet the jockey, not the horse” as it relates to investing in early-stage companies. At the end of the day, funding startups is highly risky and investors want to put their capital in the hands of an entrepreneur they believe in. Pivots are a guarantee for all startups and if an investor doesn’t think the founding team has the chops to make it through the changes, they will most likely walk away from the deal.
Bad timing. A founder may think the time is right to raise outside capital, but that doesn’t mean investors will line up to write a check. Has your company reached sales traction (i.e., revenue run rate) that your potential investors are comfortable investing at? Is your local market heavily flooded with deal flow or are investors searching for good investment opportunities? Has the market shifted for reasons outside of your control (COVID, say no more)? If you find yourself in subprime timing for whatever reason, consider pushing off the raise until the situation improves.
Misalignment on investment terms. Angel investors typically have a preferred investment vehicle they will only consider when it comes to funding startups. Usually angels will expect convertible preferred stock (with a standard set of investment rights) in exchange for their investment. Some may consider investing in convertible notes; however, in doing so they need to realistically see a path to where the notes convert into preferred stock. There are other options used such as SAFEs, common stock, revenue-based financing terms, etc., making it difficult to know the right path you should consider for your own fundraising efforts. My recommendation is to ask around to local investors (angel groups, corporate VCs) for their preference prior to pitching. This will save you time and headaches in the long run.
Unclear value proposition. Entrepreneurs are expected to pitch investors in a very short window of time. Usually only 15–20 minutes are alloted for a founder to communicate company history, a market/competitive analysis, business model, go-to-market strategy, exit potential and investment terms all. And doing so while coming off as likeable, dependable, coachable, an all-around rock-star. No one can deny the challenges of that situation. However, if an investor walks away from a pitch without a solid understanding of what your company does and why your company is best suited to win over customers, the chances of them writing a check are next to zero. Ensure you easily explain the reasoning of why your company exists and why it will succeed in the short time you have with investors. You can always grab coffee with investors at a later date and share more of your work experiences, life goals, etc.
Limited exit potential. Simply put, angel investing is a numbers game. Investors typically look to build portfolios of at least 20–30 investments with the expectation that over 50% will fail, ~40% will return 1–5x, and less than 10% will provide returns that cover the cost of the failures plus a profit on the entire portfolio. In order to reach the level of anticipated returns on such risky investments, investors need to see a path for the company to reach an exit that could provide a 10x return. If this isn’t clear, many investors will walk.
Personal influences. One of the most challenging factors outside of your control (but worthy of mentioning) is external influences that impact the decision-making process of investors. Maybe they’ve reached their investment threshold for the year? Maybe they’re saving dry powder for existing portfolio companies? Or maybe they’re just having a bad day…The reality is we all have outside triggers that influence us, whether we are aware of it or not. Angel investors are no different.
Angel investors usually approach their decision making process with the same investment thesis pitch after pitch. However, it’s worth a quick reminder that angels are everyday people just like you and I, and can be swayed from their thesis for unknown reasons. I often remind entrepreneurs that angel investing can be more of an emotional decision than a logical one.
If you’ve gone through the process of pitching angels or are about to embark on the fundraising trail, be aware of these common pitfalls. And if you hear the answer “no”, always ask for feedback on the reasoning behind the decision. Listen and adapt so that you can change investor responses the next time you pitch.
Disclaimer: The opinions expressed do not necessarily reflect those of the Nebraska Angels organization or its members.
