What do angel investors want in real estate startup investments?
Looking to raise money for your real estate startup? What is it that angel investors are looking for? What factors do they seek in the ventures they really put their capital into?
Angel investors continue to be a growing source of capital in real estate. They make more investments in startups than big VC firms, and are normally a precursor to future funding rounds, which include venture capital funds. However, while angel investment is growing, investors are becoming smarter and more particular about what they invest in. Often this is just around 1 in 90 pitches they receive. So how can real estate entrepreneurs serve up more of the ingredients investors crave?
Potential to Scale. How big is the potential for your real estate business to scale? Investors are now comparing investment opportunities to the likes of Facebook, Airbnb, Uber which have the whole world as their market. Most real estate businesses are not serious contenders for that type of business. But what is realistically possible? What percentage of transactions in your market can you hope to get? Or can you create a whole new product or service in a class of its own, where you might gain 50% or more of the market share?
Resilient Founders. Building and growing a real estate business isn’t always easy. It is fun and exciting. But it isn’t always easy. There will be days when it is downright tough. That’s why around half of all startups fail within the first few years. Those gems that succeed have resilient founders that push through, and get to taste the victories. Are you a quitter or a winner? What examples of your resilience can you demonstrate to potential investors? What will drive you through when others would give up?
Traction. Business ideas alone aren’t worth much. Active thinkers may have a dozen great business ideas every day. But that doesn’t make a business that actually makes money. Investors want to see traction, before they put their money on the line. Can you make money, when you don’t have any? If so then more money will only exponentially increase those results. If you can’t show actual sales and revenues yet; how many signups do you have? Have many organic fans do you have? What is the feedback you’ve received so far? How much progress have you made?
High Return Potential. The savviest investors demand the potential for outsized returns. In general passive individual investors have lowered the bar of expectations for investment returns. A pending era of negative rates could drop that bar even further for the average individual. 4% to 5% returns could soon be exciting to many. Yet, at the top of the food chain, the most experienced angels with the most capital understand that their potential for loss in startup investments is actually so high that they have to be shooting for 10x if not 100x returns. That’s not overnight. It might take 10 years or more to deliver on that. Yet, if that isn’t a possibility, they may not be interested.
Real Math. It’s no secret that in order to get the attention of capital partners, and to have a chance at landing their investment one of the founding team, or at least one of the earliest roles has to include a great marketer. Period. However, these investors have heard more fluff pitches in a year than you might in your life. After the pitch, and before you get a cent for your real estate startup investors are going to dig in and do their due diligence on you. They are also going to dig into your numbers, your claims, and your business plan and books. You’ve got to be able to show you know what you are doing when it comes to the fundamentals and that you can back up your projections.
Investing Alongside their Peers. In his new book The Art of Startup Fundraising, Alejandro Cremades highlights one of the most overlooked factors that well-capitalized angel investors look for, and which normally seals the deal. Contrary to how reality TV shows like Shark Tank may make it look on the surface, savvy angels prefer investing alongside each other or in partnership. In fact, quite a number of Shark Tank deals end up with multiple sharks in together. This lowers their risk, and gives them confidence in success, while potentially bringing in more capital. How can you arrange that set up?
Something They Can Add Value Too. Just as real estate business owners should be looking for investors that will bring more than money to the table, investors are looking for opportunities where they can bring more value than just money. That doesn’t mean they have to take control, or be involved in daily decision making. But perhaps they can introduce you to more connections, set up more distribution channels, raise visibility and lend credibility, and open up all types of new possibilities. Show them how they can play a role in the success story, beyond just writing you a check.