The world of startup investing is constantly changing, but there are two major investor groups in this space that remain constant: Angel investors and venture capitalists (VCs). Both are key in helping early-stage businesses grow and succeed, but they have different areas of focus and expectations. This blog takes a closer look at why the founding team is the main focus for most Angel investors.
Angel investors typically engage with startups during the pre-seed and seed stages, which are critical phases in a startup's journey towards refining its prototype, testing it in the market, and validating its business plan. At this stage, founders face inherent uncertainty and risk. They make multiple hypotheses, experiment with different approaches, and adapt to the lessons they learn. For Angel investors, a primary focus is therefore on the founding team’s ability to pivot, adapt, and drive necessary changes.
In the realm of entrepreneurship, generating ideas is often the easy part, while transforming those ideas into successful businesses requires a unique set of skills and a lot of resilience. Angel investors recognize that a brilliant idea is only as good as the team behind it. The founding team's experience, skills, and track record are essential factors that help determine their potential for transforming their vision into a profitable reality.
When seeking investment, founders should strive to possess certain qualities that appeal to Angel investors.
In the early stages of a startup's journey, the spotlight often shines on the founding team's ability to navigate the turbulent waters of entrepreneurship. Angel investors primarily focus on the people behind the business, recognizing that this phase is marked by hypothesis testing, market validation, and change. At this juncture, roughly 75-80% of the investment decision hinges on the founders. While ideas are in constant flux, an agile team can pivot and adapt to changes. Therefore, founding teams at the Pre-Seed/Seed stage must be open to change, whether it involves shifting the target market, modifying the product, or even altering the entire business model. Founders must be humble enough to accept when their initial hypotheses prove incorrect and be willing to explore new directions.
Angel investors seek founders who are passionate, innovative, agile, and willing to embrace change.
When evaluating a founding team, Angel investors consider four critical factors: business and sales skills, industry knowledge and experience, technical expertise, and startup experience. These are the foundation upon which a startup's success is built.
Business and Sales Skills: Founders must excel at selling their vision to customers, employees, investors, and partners.
Industry Knowledge and Experience: A deep understanding of the target industry and customer is critical for gaining traction and navigating challenges.
Technical Expertise: Demonstrating the capability to develop the envisioned product and continue to innovate is vital.
Startup Experience: Knowing and overcoming the inherent challenges of running a startup goes a very long way to giving investors confidence in the founding team’s ability to execute.
While it is ideal for a founding team to cover these areas comprehensively, only some teams can check all of these boxes. Supplementing the team with the right advisors and experts is the next best option to ensure these areas are covered. These external relationships also help validate the startup. When potential investors see a respected industry expert or advisor endorsing the business, it enhances the startup's credibility. Consequently, having strong advisors and a robust network can provide a significant advantage for any startup.
Investors recommend having multiple founders for a business to increase its chances of success. While a solo founder can certainly succeed, certain risks can be mitigated by having multiple founders. For example, having more than one founder reduces the risk of the company failing because a single individual gives up when faced with challenges. Additionally, it lightens the entrepreneurial load for any one person and reduces the likelihood of burnout. Therefore, entrepreneurs should consider finding a co-founder or two, to ensure all areas of the business are covered and to increase investor confidence.
As a startup progresses from the Pre-Seed and Seed stages to Series A and beyond, the focus shifts towards scaling the business and making strategic decisions for growth. Angel investors prioritize the founding team's ability to navigate early uncertainties, while venture capitalists enter the scene when a business has been validated and exhibits potential for accelerated growth. While venture capitalists still value the capabilities of the founding team, they put greater emphasis on the business and the market. It is not uncommon for venture capitalists to bring in experienced executives to help take the business to the next level and seize new opportunities.
While the focus of Angels and VCs may differ, both can agree that the founding team is the driving force behind early-stage success and is critical to shaping the future of the business, regardless of how long they steer the ship. Therefore, finding a passionate, agile and well-rounded leadership team just makes sense.