e-commerce & social media

How many times have you heard startups are hard and companies fail? You know the drill. Think about it: If angel investors were actually buying your company, they would be much more interested in its outcome. But they aren’t.

Sure, angel investors are taking a small option to buy future shares at a discount price--particularly since the vast majority of funding rounds nowadays are made through a convertible note--but in their eyes that’s just a byproduct; a consequence.

From an angel investor standpoint, you’re now competing with hundreds--if not thousands--of other startups. Every single one of them are valued between $3 million and $6 million--and in more rare cases, up to $8 million. Every. Single. One.

Let that sink in for a second. It’s like when you go to the supermarket, and you are surrounded by 20 different brands of cornflakes all priced the same. How do you decide which one to buy? The angel investor is viewing you and your startup as that brand of cornflakes on the shelf. So how do they make a decision? They take the following four things into account:

1. Product
2. Team
3. Market
4. Traction

Angel investors ask themselves the following questions while talking to you about your startup:

• Do I like the team?
• Am I comfortable with the market?
• Does your startup have meaningful traction compared with the other cornflakes beside them?

If you want to maximize your chances of finalizing a positive outcome--or in other words, having them write you a big fat check--you better have a good answer to all those questions. Any angel investor doing their homework can reach any startup through AngelList, and can also collect third-party data on you and your competitor via tools like Mattermark.

So this is how they make their purchase decision, but what are they actually buying from you? Not your company . . . but rather access to privileged information. Think about it for a second--that’s why investors don’t care if you fail, but get pissed off if you don’t share what’s happening. It’s fine to screw up, but it’s not okay to hide it. Does this ring a bell? Here’s why.

Regardless of what the average investor may tell you, the reality is no one can predict who or what will become successful. Companies pivot. Markets shift. Founders split up. In short: shit happens.

Look at three startups everybody knows: Uber, Airbnb, and Color. Uber started with an AngelList round at $5 million, and now is the hottest company on the planet. Color started off as the hottest company on the planet and vanished, regardless of a monster round. Meanwhile, Airbnb originally offered cereal and air mattresses before nailing down the model that made them worth more than the Hyatt--without owning a single room or hotel.

Another element to understand is timing. When the most exciting companies start fundraising, they usually become oversubscribed very fast. Some other companies fundraise for a long time and collect interest until they find a lead on which everybody wants to pile on, but at that point it’s the company that decides who’s in and who’s out. The actual window for investors to act upon is pretty small, and when it does open they’re forced to make a decision very quickly. If they don’t know you beforehand, then it’s very unlikely they will have the time to collect all the data they’d like.

Even if investors have known you and your startup for a while, they still have an issue--it’s very hard to see how a company is performing from the outside. A majority of founders don’t disclose monthly key metrics and their performance in time--if not from a very high-level standpoint. It’s like peering through the keyhole. Sure, they get a glimpse of what’s going on, but they cannot picture the whole story. And that’s a huge issue, because having access to information before others means being able to put more money at lower valuations. That's a win.

What’s the best way to get early access to data so you can determine the difference between an Uber and a Color? Being an actual investor. Here's the downside: lots of early bets will fail. But the upside? They’ll get privileged access to information, and they’ll be able to know--instead of guessing--who is really outperforming the other companies they have information on, benchmarking you against the other ones. Why is this important? Well . . . because of math, and because the real action is what happens next.

Put yourself in the shoes of an angel investor who has 20 investments. If you invested at a $5 million average valuation and 15 of them will eventually fail, four of them will exit for an average of $20 million, and one of them will instead make a $250 million exit. That’s a ballpark figure of around a 4X exit in four cases, and a 50X in one case. It’s a 64X return on a 20X investment; not bad at all if you can get it, and should not be taken for granted.

But here's where things get interesting. If you double down at the following round of a best performing company that has a $25 million valuation, then that's an additional 10X return on a single--and a much less risky--investment.

That means you’ll have the opportunity to get a 74X return total on a 21X investment, or a 94X return on a 23X investment . . . which is way more exciting. It’s called pro-rata rights if you’re doing a priced round with preferred shares, but any good founder will give the same opportunity to his early investors anyway, regardless of the financial vehicle used.

That’s why angel investors don’t care if you’re screwing things up and failing, as long as you’re upfront enough to share that information with them, enabling them to benchmark the other companies with you. Not only that--they’ll also be more than happy to help.

--Armando Biondi is cofounder and COO of AdEspresso, a SaaS solution for Facebook ads optimization. He lived in Italy until relocating to San Francisco in 2012. He previously cofounded Pick1 and four other non-tech companies. He’s also an angel investor in Mattermark and 10 more companies, is proudly part of the 500 Startups network, and is also a former radio speaker.