Angels Tell the Truth: What Makes a New Company Fundable

By Cathy Connett, CEO and Managing Partner, Sofia Fund


There’s more than $100 billion dollars currently being invested annually by venture capitalists, private equity firms and angel investors.  Why do some businesses get a piece of the action and others don’t? It comes down to the fundability of the company.

Entrepreneurs may think they have a great business idea, but investors may not see it that way. To learn why, entrepreneurs need to look at their business from the investor’s point of view. Just like the founder, investors are looking for a match made in heaven – when both company founder and investor make money in the end and all live happily ever after.

As an experienced angel investor, managing partner and CEO of Sofia Fund, here’s my advice – consider this the ultimate primer on demystifying the angel world.

Know Your Angels

It’s not fake news that billions of dollars are being invested in start-up and early stage companies. But it’s important to know the facts about where those dollars are going – and why.

Angel investing is done by a community made up of individuals, networks and funds that focus on early stage companies. In 2017, angels and other early-stage venture capitalists invested more than $37 billion in companies, according to PitchBook, which tracks every aspect of venture capital. That’s $10 billion more than later-stage venture funders. Additionally, $19.1B in overall investment went into 73 unicorns (those companies with greater that a $1 billion valuation), like Outcome Health, Uber and Reddit. While unicorns attract 23% of the invested capital, they represent less than 1% of the total venture deal flow. That leaves plenty of funding opportunity for non-unicorn, early stage companies.

Who are these angels and where do they come from?  According to  The American Angel, a study published by Wharton Entrepreneurship and the Angel Capital Association (ACA) in November 2017, 55% of angel investors were previously a founder or CEO of their own start-up and are interested in backing others like them – from sharing their knowledge of the early-stage investment ecosystem to making connections to resources that enable entrepreneurs to grow their businesses.  51% of angel investors have a background in technology.  The study also finds that 22% of angels are women — a number significantly higher than the number of women in the venture capital ranks.

Some angels invest for the greater good of helping a business get on its feet, to support women in business or to further a cause, and don’t necessarily prioritize making a financial return. But for most angel investors, including the Sofia Fund, making money is a primary focus of investing in early-stage companies.

The Risks and Rewards an Angel Takes

Angels not only provide dollars, but expertise and resources to help both the founder, and thus the investor, become successful. And the risk is large for both parties, as there are many unknowns. This drives the investor’s focus toward deals with a great potential return, because there is a high probability that only 1 in 10 investments will reach their full potential.

Data has shown that even experienced investors typically only receive a return on approximately 40% of their deals, including deals where the return is less than the original investment.  The partners in the Sofia Fund have invested in more than 50 companies.   While the return on all investments has been well above the average 25% angel internal rate of return, we have also had our losses.  Of the 26 companies where we are no longer investors, 11 returned no monies and 2 returned less than our original investment.

Focused on the After Life

Investors want the entrepreneur to be successful so that he/she can deliver a profitable exit, for all parties.  The target timeline for the exit is within 3 to 7 years after investment. A successful liquidity event is typically the sale of the company to another party.  This could be to a strategic buyer, a private equity firm that is developing a strategic portfolio, or the public markets via an Initial Public Offering (IPO).

“Banking” On Your Business

Angel investors do not loan monies with the promise of a large pay-out at some time in the future.  I learned this the hard way when I first started raising capital for early-stage businesses.  It was the mid-1990’s, and I offered my former employer turned investor (a very successful entrepreneur who had sold his business) an opportunity to invest in a company where he would receive a more than 5 times buyout in 3 years.   His response was: “If I invest early when there is a lot of risk, why would I leave the deal just when the risk has dropped significantly and the greatest returns start happening?”  It was hard for me to argue with his reasoning.   Investors are not making a loan, they are partners in the development of the new business, with a focus on the end game – an exit – when an investor realizes the ultimate value for the business he/she helped create.

It’s Simple Supply and Demand

Angel investors seek out the deals with the largest potential for returns. At Sofia Fund, we believe the companies with the best potential have a product or service that solves a significant problem that currently exists within a large marketplace. For us, a large market is $1 billion or more in overall opportunity for the product or service. This means our portfolio companies have strong value propositions, not only for the end-customers but for the entity that will ultimately create the liquidity event.

Early-stage investors look for the company’s “secret sauce” – a proprietary technology, an ability to create unique barriers to entry for others, or a unique position in the marketplace with customers and/or strategic partners.  Investors know that big opportunities usually require unique positions or technology to make large market inroads and become successful.

A new company could have a new proprietary technical solution that not only solves a customer’s problem but could become a valuable new product or product category to an existing company who has the distribution network serving that marketplace of customers.

For example, a new protective coating for construction products would not only appeal to the construction marketplace but, once proven there, could also be a great new product for a major building material supplier. Thus, creating an opportunity for an exit for the entrepreneur and investors.

Successful early-stage companies make efficient use of their capital, spending it in areas that create value for a potential buyer.  Many entrepreneurs are focused on today’s issues and don’t address this aspect of their business. At Sofia Fund, we work closely with our portfolio companies to focus them on how and with whom a potential exit could occur. This allows them to reverse engineer how they build their company in the early days, and where they focus their capital to build the most attractive value proposition for the exit.

Who’s On Your Team?

Because there are so many variables in early-stage businesses, which create many “unknowns,” the most tangible factor in the deal is the entrepreneurial team.  The investor continually assesses the team’s ability to leverage its strengths and the advantages that come from diverse experience, expertise and perspectives.

The Sofia Fund specifically focuses on women-led business, partially because of our commitment to helping women get access to investment dollars, but more importantly because data confirms that gender-diverse management teams have driven success at all stages of a businesses’ life cycle.  It is a smart investment strategy for Sofia Fund to want to find businesses with diverse teams in the deals we fund.  According to Harvard Business Review, the average woman-owned business makes 20% more revenue with 50% less investment than other companies.

And, since investors are often bringing resources or connections to a deal, the ability of the leaders at the company to constructively interact with everyone involved in the company’s success is paramount.   Investors are betting on the success of the team so vision, passion, expertise, diversity of capability and coachability are all important aspects that are considered.

Are You A Committed Visionary?

Another important aspect investors consider is the team’s vision for the business. What is the inspiration and the aspiration for the business? How well does the management team understand the problem they are attempting to solve? Is the vision based in reality, i.e. based on the experience the leaders have in the marketplace? Does the team carry out the vision operationally? How do they function together, around a shared vision?  How do they deal with risks to the vision? How committed are they to the vision?

Beyond successfully answering all of these questions, entrepreneurs also demonstrate their commitment to the company by investing their own money, and those of their friends and family, who also believe in the vision.  If people you know trust you with their money, it speaks volumes about your character as an entrepreneur.


There are 500,000 to 600,000 new business that are started every year. The money is there for those entrepreneurs who take the time to understand and follow through on the investment process. For those who do, there are angels waiting in the wings.


Cathy Connett is CEO and managing partner of Sofia Fund, which invests in high-growth women-led businesses. She is also president and founder of CorConnections, which specializes in guiding businesses through new business initiatives, equity infusions, ownership transitions and the building of alliances and partnerships. Cathy and her partners have been investing in companies for more than 30 years.