When angel investors put money into a business they’re generally laying their own cash on the line. So they’re careful about what businesses they back.
But how do angels think? What are the most important factors they look for when choosing a business to fund? A new study called the “2014 Angel Investment Outlook Report” offers insights that should make business owners and entrepreneurs take notice.
The report was commissioned by Worthworm (www.worthworm.com), a Web-based valuation system used by angel-investor groups and entrepreneurs. When a cross section of angel investors were asked what’s most important to them, they named such things as reasonable valuations, market size, industry sector, founders’ backgrounds and the company’s stage of development.
But one factor stood head-and-shoulders above the rest: sustainable competitive advantage. Nearly half of all angel investors named this as the single most important thing they consider when investing in a business.
But what is “sustainable competitive advantage,” really? Many people think it’s a new technology or maybe a process that’s hard to copy. Or perhaps some kind of cost-structure advantage (i.e. we can do it cheaper!). Trouble is, if it works better or costs less, others WILL copy it.
Think of sustainable competitive advantage as a moat that surrounds your business. How difficult is that moat for others to cross? Is it deep and wide? Is the drawbridge solid and retractable? Does the moat have alligators?
Here are things that can help a business create sustainable competitive advantage:
• Intellectual property. Intellectual property is something your business owns and that, in some cases at least, can legally prevent other businesses from copying it. This includes patents, trademarks and copyrights, of course, but also such things as long-term contracts and unique domain names.