Angels are a unique breed when it comes to investors. They’re usually self-made, make decisions mostly based on their gut feelings about a given opportunity, and are often considered more approachable than the big bad venture capitalist sharks of the sea.

Do keep in mind though, that angels are in it to make as much money as possible. Whether over the short term or long haul; angels expect a return on their money. After all, if they were just into investing to help you and the world at large to succeed, they’d be better off putting their money into philanthropic efforts instead of investing in your business.

Most important, for an angel to justify investing their money in your startup, they have to be able to justify that investment. In order for a given investment opportunity to be worthwhile, what you offer has to be able to generate more of a return than they’d be able to make investing in stocks, bonds, real estate, commodities, etc.

It’s easy for a startup founder to lose sight of this all important fact. Viewing the angel as a shining white knight that’s just looking for a pleasure project to sink their teeth into. In fact, they’re anything but. Angels are savvy investors looking for sound investment opportunities.

What affect angel investors’ investment decisions

5 key factors affecting an angel’s ROI outlook when assessing an investment:

  1. The current valuation of the company.
  2. The probability of the company being sold or going public.
  3. The estimated price of the company at the time it will be sold given the current and projected sales data.
  4. How many times the company is likely to need money before it’s sold.
  5. How long before the company is likely to be sold after investing.

Number 2, in particular is very important to an angel. By becoming a shareholder, they’re entitled to a percentage of the sale price when the company’s sold.

If you never sell the company, they’ll still have an equity stake. However, considering some profitable startups are selling for 10x revenue, and others are selling for millions based on the perceived value of their intellectual property, the potential ROI from a fairly swift sale should be obvious to anyone.

Investment analysis

How angel investors (try to) get it right

Successful angels boost their financial return by getting these elements right more times than not:

1. Buy low, sell high – sell quickly

It’s not just about how much money they end up with in the end that matters. It’s how much an angel gets when the company’s sold, minus what they put in that really counts. It’s all about multiples. How much they put in, versus how much comes back. Making $5,000,000 from a $50,000 investment holds a lot more value than getting a $10,000,000 check after investing $2,000,000 or more.

First the multiples from the first example are much higher (100x) vs the second deal (5x). Second, keep in mind that their money is tied up from the minute they invest until the company’s sold. Meaning it’s not working for them, but rather for you until they get their return.

Then there’s the speed at which the company can be sold after an investment’s made. As mentioned, the angel’s money is going to be sitting in your company until a sale happens. They aren’t free to invest that cash or the resultant ROI until then. The longer that money’s tied up, the greater the chance they’ll never see it again.

2. They look for high value companies that don’t need much capital to stay in the black

We’ve all heard about big tech companies who get several rounds of million dollar funding to gain marketplace traction. That’s venture capital territory, not at all what angels look for in an ideal investment opportunity. Angels look for companys that don’t need millions to grow their value. The reason being, angel investors don’t want the value of their stake in the company to become diluted with multiple successive investors coming in.

SaaS and other online service based companies are very popular among angels as they meet this requirement quite nicely. As a contrasting example, any company that requires vast amounts of equipment, research studies, and high volume numbers of employees would be something an angel would avoid, knowing that more and more investors would be needed as time wears on.

This is the main reason angels are known for capping investments at the half-million dollar range or less. Less capital invested equals higher returns at sale time, if you’re looking for the quick exit.

3. They invest in companies in industries that typically have lightning fast outcomes

Ask any investor what their idea exit strategy is and they’ll all tell you “the faster the better.” This is because no company’s future is guaranteed. We’ve all seen evidence of this reality throughout our lifetime. Company “X” monopolizes their respective industry today, only to be toppled by companies “Y” and “Z” a year or few years from now.

Angels don’t go looking to invest in businesses that need vast amounts of time to grow, like biotech and civilian space travel. Instead, angels like to seek out high-growth, fast exit businesses like app development and real estate in exploding markets. If your company’s outcome is set in years, angels aren’t likely to ink a deal with you.

Angel investors are indeed among the most savvy of all. They have more money to invest than your typical household investor, while carefully keeping their risk much lower than their multi-million and billion dollar VC counterparts.