When I started all my businesses, it was just me and my savings account. Unfortunately, I didn't have an Angel investor or rich buddies who could bankroll me. It's these personal savings and revenue generated by the business, coupled with other resources that do not include external financing, is what we refer to as bootstrapping. Almost all tech startups, and small businesses, start this way (these are not the same).
Being an angel investor can be a rewarding experience, financially, personally, and professionally. But before you jump right in, it is important to stay rational and realistic about what you can expect as a return. Bootstrapped businesses have, more often than not, come with different challenges compared to well-funded businesses.
In this blog, we will explore 10 aspects for angels to consider when investing in bootstrapped startups, including assessing their financials, determining the founder's strength and background, and that of the team, etc., which can help increase your chances of making a success and positive impact on the growth of the business and your ROI.
Tip #1 - Proven track record
Track record may not look like years of experience or accolades lining up. It could simply look like a savvy founder, who has been able to make magic happen within tight boundaries, given limited resources.
Tip #2 - Assess the team
The team may not be big, but they are fit for purpose. Looking at each person's contributions to the success of the company thus far, and assessing their commitment to the future commitment to continued growth and success.
Tip #3 - Evaluate the market
A bootstrapped business may not have done extensive market research, well further than desktop research and some customer research, so take a look at similar players who have identified underserved markets, solving new or existing problems that people are willing to pay to have solved for them.
Tip #4 - Consider the potential for growth
Looking internally, bootstrapped businesses have limited resources to expand. Has the founder and their team come up with a plan for organic growth and does it make sense? Are their assumptions reasonable, realistic, and likely to be obtainable without the injection of external capital?
Tip #5 - Consider the Founder's vision
This is where the magic began. Without a clear vision and understanding of their customer problem, their passion may just be as good as a hobby. The Founder and their team should be passionate and unrelenting in their pursuit to solve their customer's problems, and they are able to convince others to join them on this journey. Do you resonate with their vision and are you open to supporting them in attaining their vision? Do you have shared values upon which you can grow together?
Tip #6 - Assess the company's financials
Depending on what stage they're at, don't expect perfect revenue growth numbers, margins, or profits. Assess their ability to manage finances to drive their company toward attaining healthy cash flow, margins, and profitability. Do they understand how to use their financial statements to manage the business?
Tip #7 - Look for low overheads
Identify their fixed costs and assess whether they are managing funds appropriately to grow the business with its limited resources, whilst improving margins and reducing risks. Can they demonstrate how profits will be reinvested into the business to get to breakeven and positive cash flow?
Tip #8 - Be prepared to provide more than money
In the early stages, founders need money and mentorship, especially first-time founders. Be open to being an active Angel who can dedicate some time to mentor startups, create connections, open up networks, assist with business development, and be an ambassador for the business. You may not have built a business yourself, but you may have skills, experience, and networks that can be shared and leveraged to grow the business.
Tip #9 - Consider the potential for strategic partnerships
Bootstrapped businesses will not have the resources and money to build in-house capabilities similar to their counterparts/competition. Evaluate their ability to network and negotiate key strategic partnerships to deliver on aspects of their offering that they may or will eventually bring in-house. Take a deep dive look into relationships with suppliers and key distribution partners who are well-positioned to help them grow and scale.
Tip #10 - Be patient
This is a slow, long journey. Investment periods are long, but with the right support, these businesses can turn out to be strong players, that are likely to weather the storms and come out stronger on the other side, safeguarding your investment.
Conclusion
This is a very high-level list of aspects to consider when investing in early-stage tech startups that have been bootstrapping. It's by no means a comprehensive list and you need to consider many more factors during the due diligence stages. By, at the very least, following these tips, developing your personal investment thesis, and setting clear expectations, you can attract the right founders and deal flow to grow your portfolio.
If you're an aspiring angel investor, feel free to join our bi-weekly calls to help you on this journey. If you're a seasoned angel investor, who wants to bring more people along on this journey, we invite you to connect with us as well.