Angels’ 13 Fears Surrounding Funding a Startup’s First Round
Of all the reasons an Angel investor might decide against funding a startup’s first round, here are the 13 most important:
Fear of Loss of Ownership and Influence in Future Rounds. A good friend of mine sent me an email saying: “My fear is the lack of deep pockets around the table. That puts you, as an early-stage angel, at a big disadvantage when you want to do the next round.”
A related fear is Fear of Dilution. This is especially true when startups have “High TCR” (total capital requirements). Angels simply fear multiple rounds of financing—even more so when big institutional investors are involved.
Fear of the Unknown Founding Team. First-time CEOs and founders are often a major concern that early investors can’t reconcile with. If they perceive team as unproven or untested, and without an extensive track record, this fear emerges as a major negative.
A related fear is the Fear of Founders Not Being Able to Cross the Finish Line. This fear arises from the perception of founders who lack stamina or commitment, who seem to have too many irons in the fire, or who lack the ability to play nice in the sandbox. Angel investors like to see founders with continued involvement in the company because they are an important data source and potentially look after Angels’ interests, especially at exit time.
Fear of the High Rate of Failure. About 90% of all startups fail within the first 18 to 24 months, mostly from a cash crunch. Many Angels can’t stomach these odds and regard them as an underlying reason not to invest. This fear usually works in tandem with another fear.
Fear of an Also-Ran. When a startup is not a “hot deal” or doesn’t fit into the hot technology or business category, founders face an uphill battle on their first funding round. For example, the semiconductor and applied materials segments suffered from this perception for many years, at least until the semiconductor shortage and AI chips came along.
Today’s hot deals include AI, food tech, health, and biotech, programming the blockchain, robotics, etc. The list is ever-changing. Sometimes this fear is expressed simply by the absence of hungry, deal-crazy investors.
Fear of the Duration of Seeking Funding. Investors sometimes get cold feet when it takes too long to complete the first round, or a subsequent seed round is delayed, or a long runway to get to Series A. Startups have short shelf lives after the initial presentations are done. After two to three months without financing traction, Angels get concerned.
Fear of Insufficient Domain Expertise. Many Angels fear they do not properly understand the technology in the deal (e.g., AI chips or vertical manufacturing software), in addition to the marketing, sales, operations, and other go-to-market strategy and tactics that drive the startup.
Fear of not having the right investors. Many Angels are not visionary investors and are incapable of directly helping the startup. They want to be involved but these Angels lack the background or skills of an early-stage VC.
Fear of Competition and Insufficient Market-size. Angels often do not fully understand the startup landscape specific to their potential investment all that well. They will ask: “Is your TAM big enough?” Frequently, fear of new entrants and markets can lead them to pass.
Nits over Terms. There are so many, but the one heard most often today is: “Your pre-money valuation is too high.”
Fear of Illiquidity. Without a realizable exit within five to seven years after investment, your company might be deemed not on the Angel’s “exit horizon”.
12. Fear of Complexity. They say: “You are boiling the ocean,” meaning your pitch is complex and your company doesn’t feel right to the Angel, or the founders don’t express themselves in simple terms.
Many Angels get squeamish when these fears abound. When one or more of them combine and increase over time, it’s an uphill battle.
The best ways to deal with these fears is to meet them and other shortcomings head-on. Among the ways to address these fears are things like taking on senior advisors or a Board Member before the round, or produce more POCs. Another tactic to diminish the fear is finding a proven “lead” Angel who serves as an advisor to the company. This investor should have a bigger stake than others and may negotiate terms. Simply educating your prospective investors is a fruitless proposition. Only concrete progress dispels fears and creates funding momentum.
Lastly, the first round of financing is often a numbers game—kissing many frogs, if you will. Be better prepared as you go into each presentations and brace yourself for many of these sessions in a short period of time.