Top 10 Reasons Angel Investors Turn Down Startups

April 19, 2020

Angel investors typically allocate capital to only a tiny fraction of the startups who pitch them. Here are the 10 most-commonly-cited reasons angels pass on startups:

1. Business is too easy to replicate

As soon as your company starts seeing success, you can be sure the attention will attract copycats. Deep-pocketed competitors can easily crush fledging startups, so if you don’t have a way to defend against them, your startup is at risk. The best way to stave off such aggressive competition is for a startup to have something proprietary. Failing that, difficult to replicate technology can sometimes be deemed sufficient.

2. Total addressable market isn’t big enough

No matter how sticky your product is, if there aren’t enough people out there willing to buy it, your startup will never achieve exit velocity. Remember, angel investors make allocations based on an exit plan, and getting acquired is the most likely exit scenario. If the TAM for your product isn’t greater than about $1 billion, there likely isn’t enough upside potential in your sector to attract a buyer.

3. No sales made yet

Simply put: it’s a rare startup that can attract angel investors without having yet made a single sale.

4. Marketing channels not yet proven

Angel investors want to be sure their money isn’t getting used to experiment on paid marketing channels. Founders, then, should be able to provide metrics showing that paid marketing has proven effective. The angel’s money could then be used to scale up the marketing budget.

5. Not enough data

While it is natural for startups to have limited data, the more you can offer, the better your chance of getting funded. Ideally, you should provide data showing your key performance indicators and how they are affected by actions you’ve taken. Failing that, you should demonstrate that you understand which metrics are important to your business and how those metrics can be changed. This shows the angel that you at least understand how to measure success and what actions you’ll need to take to achieve success.

6. Not enough post-close runway

If a startup, after its seed round, can’t possibly make it to either profitability or the next funding round, it is destined to fail. Most angels won’t be comfortable investing unless a startup has at least 1 year of post-close runway. Any less than that, and the startup’s growth will be throttled by the need to seek out more cash.

Founders, therefore, should provide angels with data showing (a) their current cash burn rate, (b) how they will spend the seed money, and (c) how much cash they will be burning each month post-seed funding. For (c), founders should provide estimates based on two scenarios: (1) zero revenue, (2) revenue given projected growth.

7. Not thinking big enough

The high-risk nature of startups means that angels won’t make money unless the winners win big. Assuming a 90% fail-rate, a single winner would have to provide a 10x return just for the angel to break even. As a founder, then, you should have a clear vision for how to grow your company by 100x. That’s the kind of growth most angels are really looking for.

8. Not enough focus on competition

While it’s common for founders to think their product is so unique that there’s no competition, angels aren’t buying that. Founders should take the time to understand how their target customers are currently having their needs addressed. Doing so will provide insight into the competition. Then, based on that insight, founders need to find ways to differentiate their product in order to correctly position it for success. Demonstrating this basic understanding in your pitch is essential.

9. Not enough skin in the game

Founders who have demonstrated that they are working full-time on the startup and have invested a significant amount of their own capital, are much more likely to receive funding. Angels need to see that you really believe in your startup, that you’re willing to put everything on the line for it. If you’re not, you can hardly expect an angel to back you.

10. Lack of trust

Angel investing is all about relationships. It is essential, therefore, for founders to be completely forthright in their meetings with angels. If the angel suspects you are inflating numbers or otherwise being dishonest, she will walk away and never look back.