Talk to any startup founder, and they’ll tell you that initial capital funding is perhaps one of the most important aspects of helping to secure the company’s future. Early-stage investment provides startups with the capital needed to move projects through the development pipeline and help lift them off the ground.

However, a challenging few years in the startup investment environment have meant that funding opportunities have been few and far between, and funding sizes have become a lot smaller compared to the pandemic-era tech startup hype.

Fortunately, obtaining funding is not a one-size-fits-all scenario, and often startups look towards angel investors as a secure and reliable source of funding. For the most part, we understand that angel investors are individuals that use personal capital to directly invest in a business or startup, and seek to obtain a high return on investment.

Yet, angel investing is nothing new to the scene. However, attracting investors and securing deals have become much more difficult in recent years, requiring startups to have well-orientated business planning and deliver more dynamic results in a highly competitive marketplace.

Scaling product, service, and marketing activities requires capital, and without the proper financial resources, navigating through market challenges can become a tumultuous experience, often resulting in failure or closure of the business.

The Changing Investment Landscape

Across all industries, startups have been having a hard time securing near-term investors, as funding opportunities have not only been on a decline, but the size of deals has been shrinking as challenging economic conditions push investors to retreat.

In some way, startup investing has lost its allure. Following several years of economic hardships, and wider social and political uncertainty, investors, along with venture capitalists have instead looked towards more buoyant and safer options, leaving startups in a highly volatile position.

The number of deals has fallen from its former peak, with 2023 marking the lowest venture funding activity since 2018. By the fourth quarter of last year, total investment deals reached $285 billion, which represented a 38 percent decline from the $462 billion invested in 2022.

Angel investors have also backed out of the startup ecosystem. The number of deals backed by angel investors dropped by 47 percent at the end of last year, with more investors holding back capital funding, as wider uncertainty over macroeconomic conditions persisted.

Decreased funding and deal availability have meant that fewer startup exits were recorded over the period, with private company valuations falling and fewer startups making it to an Initial Public Offering (IPO).

“In the last few years there have been bigger economic challenges investors have been factoring into the deal-making process,” says Daniel Azzoli. “Investors have been met with more uncertainty, and bigger volatility, which has not only made an impact on their portfolios, but has forced them to adjust and rethink how they invest in startups, and which is worth their time and money,” he says.

A competitive market has meant that many startups have instead turned to selling their product or services directly to an existing company, allowing them to partner with a business that has an established presence in the market.

Some startups have simply been swallowed up by larger conglomerates, which in turn has helped startups from going under, but also shielded big-tech companies from facing hardships in the consumer market, allowing them to become more competitive, and deploying more innovative products.

Google's parent company Alphabet ranks among the top for acquiring the most startups, with over 222 acquisition deals completed between 2000 and the first half of 2024. Other big-tech companies including Microsoft, Cisco Systems, Accenture, Apple, Amazon, and Meta Platforms are all among the household names acquiring existing startups.

This isn’t only happening in the tech space. The global payment network conglomerate, Visa has completed more than 20 acquisitions in recent years, with each acquisition averaging around $3.22 billion per deal.

The lackluster investment environment has pushed many startups either to sell their proprietary technology to other companies, in the hopes of partnering on future endeavors, or be bought over by big-tech and multinational firms.

What Angel Investors Are Looking For In Startups

Angel investors understand the inherent risk of investing in startups. For them, this is an opportunity to provide capital funding to a business with the expectation of receiving a return on their investment. In some cases, this may also be an opportunity to have a hands-on approach to help entrepreneurs develop the business in a direction that’s meaningful to both of them.

However, to secure angel investors, startup entrepreneurs need to have a dynamic approach that will allow them to remain agile, while adjusting to a changing marketplace and ensure their competitive edge is enough to provide angel investors with sufficient investment opportunities.

Reliable Return on Investment

Investing in a startup comes with a wide range of risks, something which angel investors usually measure beforehand. These risks, whether financial, market, or regulatory, play an important role in the amount of return an investor can expect to receive from their investment.

In some instances, the return on investing in a startup generally provides investors with an average yield of 7% to 10%. This is, however, in a good case scenario, where a startup already has an existing product, service, supply chain, and working customer base.

However, most startups don’t succeed in delivering this level of performance. Around two-thirds of startups will never deliver investors with a positive return, according to research by the Harvard Business Review.

Angel investors look for startups that can provide a product and service that will serve a bigger demand in the market. They look for businesses that can fill the gap, and provide a workable solution to other companies or consumers.

Seeing as an angel investor will be using their personal capital to fund these and other business ventures, startup entrepreneurs need to prove that they have all the necessary requirements that will provide long-term success, and above all, near and long-term return on investment.

Functioning Business Plan

Across all industries and sectors, approximately 90 percent of all startups will fail. More than this, around 10 percent of new startups fail within the first year, with the majority of 70% failing between two to five years after opening.

Aside from financial challenges, weak market penetration, improper business planning, and more importantly, the lack of a functioning business plan are among the major causes of startups failing within the first several years.

Startup entrepreneurs need to develop a well-articulated business plan that is composed of different financial and risk-related facets. A business plan is not only important to help establish business structures, but it also equips entrepreneurs with a clearer understanding of market-related risks, challenges, opportunities, and potential competitors.

A business plan gives angel investors reassurance that a startup has investigated the necessary structures and procedures, but more than this, has determined forward-looking projections, burn rates, and exit strategies.

For angel investors, a business plan is a way to assess a startup's understanding of the market and industry in which it's operating. During the early days, months, and years of any startup, the business plan acts as the guiding blueprint for all executive team members, and without it, any team will find overcoming complex business problems increasingly difficult.

Strong Leadership and Management

Startup leadership is what helps drive innovation, development, and company scalability. Ineffective leaders can detract the business from achieving its goals, falling behind market competition, or losing customers due to improper relationship management.

The success of a startup depends on its leadership. Having an effective management team or leader in place can help drive more hands-on development for the business, but ensure the necessary opportunities are being tapped, without exposing the company to additional risks.

Angel investors look at more than just how a team is being managed. They often consider important factors such as leadership styles, problem-solving skills, communication, employee management, and task delegation.

These are all smaller details that play a very important role in attracting the right candidates to a startup, but assuring angel investors of the leadership abilities of any executive team. For startups, there is such a thing as having too many cooks in the kitchen all at once.

Research shows that having two founders will increase investment by 30%, and deliver three more times customer growth rates. Knowing that leadership isn’t only important for the business, but securing funding will provide a clearer understanding of how a startup should structure its executive branch.

Positive Product and Service Traction

In any scenario, data dictates the decision-making process. Data helps startup entrepreneurs make more calculated decisions that will positively impact the business going forward. Similarly, data and early traction of products and services will help give angel investors better proof of company recognition within the industry or marketplace.

Having a positive traction record requires entrepreneurs to invest in the facets that will deliver them the desired outcomes. For instance, looking at methods to market a product more effectively, or putting the right services in front of the appropriate audience, are all part of building a successful traction record.

Traction can be considered in the scheme of knowing which marketing channels work the best for the business, or how to obtain more customer-specific results. In the short term, this data delivers an overview of where issues may have gone unnoticed, and how improvements can be implemented more effectively.

In the long-term, angel investors consider early traction as proof of adoption within the marketplace, but that an idea, concept, product, or service is already a working solution among customers. There is a lot of power in the data a startup collects, and early traction can potentially provide more investment security.

Long-Term Market Compatibility

Startup entrepreneurs need to ask themselves whether there’s a need for a product or service in the marketplace, but more than this, whether there will be a long-term demand in the years to come.

These are questions that angel investors often ask founders, and to determine this, many angel investors will evaluate a startup’s market penetration rate, and whether or not an industry has become saturated with more established competitors.

There are plenty of real-world examples where a company delivered a product or service, but failed to make a long-term impact due to a lack of innovation, demand, or rising competition.

Failing to innovate, and to make the necessary changes that will ensure longevity can be dangerous for any company. Not only do ineffective strategies affect a startup’s success, but failure to demonstrate a willingness to adjust and transform can scare off investors, or present the startup as an unattractive investment opportunity.

Strong Market and Consumer Support

Startups help to solve problems, and without any problem to solve or market to service, any innovative company will quickly become irrelevant or obsolete. In fact, around 35 percent of startups will fail because of weak market demand or a lack of market need for their product or service.

A startup entrepreneur will only know whether there is a need for their business, product, or service in the market following careful analysis and research. This process should be well executed during the initial planning stages and will need to form part of the startup's wider business strategy.

Aside from a direct demand or need for a specific product or service, angel investors are often looking for startups that already have an existing customer base, partnerships, or collaborations with other companies.

Support should be multi-dimensional, and startup entrepreneurs should consider how they can leverage their products and services to allow them to establish themselves as a key player in the marketplace. Having a track record can act as proof to an angel investor that there is a strong demand, but there remains enough legroom for the startup to scale at a manageable pace.

Legal and Regulatory Issues

Potential legal actions or changes in a country’s regulatory environment can quickly impact the long-term profitability and success of any startup, something that both entrepreneurs and angel investors often carefully consider throughout the development of the business.

There are plenty of examples of startups that failed or were forced to cease operations due to a change in regulatory requirements or excessive legal actions taken against the founders or the company itself.

For example, Koinex was an Indian-based cryptocurrency exchange platform founded in 2017. By 2019, the company had grown to roughly 50 employees, but quickly faltered as regulatory laws regarding cryptocurrencies in India abruptly changed, which created a plethora of obstacles for the company, and led to the startup bleeding cash.

An example of legal challenges can be seen with the U.S.-founded Grooveshark, a music streaming service founded in 2006. The startup raised upwards of $10 million at its peak, however, an investigation found that the company was illegally streaming music, and a wave of lawsuits had forced the startup to shut down in 2015.

Scrutiny can come from any corner of the public domain. For startups that operate in highly regulated industries such as finance, tech, and consumer goods, angel investors often consider the possible legal and regulatory ramifications that a company may endure throughout its tenure, and whether a business is equipped with the know-how to navigate these challenges.

How Startup Entrepreneurs Can Attract Angel Investors

Locking a high-quality investment deal doesn’t come easy. More than this, finding investors isn’t as easy as one might think, and there are plenty of hoops any startup entrepreneur will need to jump through before landing an investor who’s willing to take a chance on their business.

Market Exposure: Putting a product or service in front of a customer is an important first step any entrepreneur should take. Gaining the necessary market exposure provides entrepreneurs with the early product or service traction that will allow them to better understand their business, and how to approach certain issues. With this, gaining exposure brings a startup closer to a potential investor, and acts as the proof an investor needs to see that a startup has existing market support.

Professional Pitch Deck: Any entrepreneur looking to impress an investor should consider the importance of having a professional pitch deck. The pitch deck should include relevant investor information, along with supporting market analysis, research, and customer testimonials. The pitch deck is a supporting memorandum that brings together important data and figures to showcase the startup’s investor opportunity.

Networking: Finding the right investor can come from talking with other people in the industry. This includes executives, former colleagues, or seeking professional like-minded individuals who are willing to connect founders with investors. Networking opportunities come from building relationships and looking for ways to foster connections with other professionals.

Provide a solution: Investors want to see how a business or startup can not only fill a gap in the market but more importantly, provide marketplace solutions that attract recurring customers. Entrepreneurs need to place their solutions at the front and center of their business, which in turn could help investors better determine whether a startup has long-term potential in the current marketplace.

Product or service demonstrations: Angel investors want to know more about the type of product or service they will be investing in. This means that entrepreneurs need to focus on ways to put these services in front of investors and give them a first-hand demonstration of how these services will work. These demonstrations need to be interactive and should involve the service or product delivering a direct solution to a consumer or business need.

Finishing Thoughts

Startups are not only facing a more grueling consumer market but lackluster investor support and opportunities have further added more obstacles to navigating the startup landscape.

In a fast-changing environment, where investors are looking to invest in risk-averse companies that can provide more accurate market solutions, startup entrepreneurs need to find an approach that will allow them to remain resilient but seek innovative ways to sustain themselves before bagging the right investment opportunity.

While angel investment activity has declined over the past few years, those startups that are able to overcome challenges, and present a compelling case for investors are likely to scale and succeed within a supportive environment.