Today, we launch a new content series to help startups become #investmentready for 2025. In the first of our Meet The Investor interviews we speak to Phil McSweeney, angel investor and author of AngelThink. He shares how a chance encounter led to his successful career as an angel investor. Additionally, he discusses the key factors that drive investment decisions, the common pitfalls founders face, and the strategies for building strong relationships between investors and startups.
Why did you become an angel investor?
OK – here’s the truth – I became an angel investor by accident. I had been made redundant, had time on my hands whilst wondering what to do next and went along to an angel group meeting as a guest. I got hooked on the storytelling.
Which sectors or new investment opportunities are you most excited about right now?
I look for inflection points where there is a signal for change in the market, or technology, or need. I look for some sense of inevitability – this change will happen because there is a force driving it (e.g. legislation, consumer behaviour). You might argue that sustainability or climate change would be an example, or a need for greater productivity or competitiveness.
What are the key foundations to building a strong relationship between investors and founders?
In my book, AngelThink, I talk about the psychological contract – a respect by both parties that they will try to meet the needs and aspirations of the other. They need to come to trust each other, and openness and integrity are part of that. Angel investors will look for certain key attributes in a founder – I usually flag determination, self-belief, courage and spirit as key. It’s easy to write a long list here; then you find that no-one meets all the criteria.
What common misconceptions do you encounter among founders about the fundraising process, and how can they better prepare themselves to address these?
Many early founders think fundraising will be relatively easy, because they believe they’ve built such a great product or service. It can come as a shock to founders that investors have such a breadth of choice regarding what they can invest in, and despite a founder thinking they have something novel, it’s quite common for investors to say they’ve already seen something very similar. It’s common to find founders building something that there isn’t a strong enough market for – driven often by their own confirmation bias and impatience.
Don’t rush validating your idea or cheat yourself. Further, founders should prepare themselves financially well in advance – be prepared to survive off savings or part-time earnings, or a little consultancy for upwards of a year before you’re generating enough revenue to pay yourself a reasonable wage or have raised a good level of funds.
What are the most important factors that lead you to back startups today and has this changed over the years?
There is a greater emphasis on showing some revenue at the start. Go back a couple of years or so to an age of cheap money and founders with just an idea stood a chance. That’s much rarer now.
Can you share a specific experience where an unexpected challenge influenced your investment decision, and what lessons did you learn from that situation?
Founder breakups are often unexpected – especially when founders have known each other for many years before they decided to develop a startup. I always want to see a founder agreement in place now when there are two or more founders involved.
How do you measure the impact of an investment beyond just financial return, and does social responsibility play a role in your investment strategy?
Yes. You have to make a distinction between impact investing and philanthropy. As an impact investor you would still expect to make a return on your investment, and for the company to be managed just as well, though you might not have such high ROI expectations. You would still expect scale. You would expect some of the metrics a company measures to be showing social impact.
As market trends and economic situations evolve, what approaches are you employing to mitigate risks while identifying promising startups?
As an angel, you expect a level of risk. You must expect some failures. If you don’t, you’re in the wrong game. Having said that, revenue helps at the early stage but also that the founder(s) can evidence as best they can a market size and that they can demonstrate competence in building a company.
If you could offer just one piece of advice to a young startup, what would it be?
I don’t want to sound facetious here but ‘Are you absolutely sure you want to do this?’ It’s not a game or work experience or whatever – it’s building something that’s going to change the lives or an aspect of their life for a significantly large number of people. If you don’t have the hunger for it and aren’t prepared for the long haul then don’t start. Don’t waste your time or anyone else’s.
What could the new Government do to best support the UK’s startup ecosystem?
I’d entertain a trial of an idea that would work like a grant paid monthly of a living wage for say, two or three years to new founders coming through a competitive process to build a business, with mentor support attached to them and they studied for a degree in entrepreneurship at the same time.
Perhaps part of it could be loan -based, which they would pay back later, but they would be supported during the process to raise money as their idea grew. The funder would have a small stake in the business.
Our recent survey of startups showed that less than 50% of startups had a good understanding of the fundraising process. As someone who has written a book on this topic, what is the reason for this knowledge gap and what can be done about it?
There’s just so much to know! And often what early founders think they know is wrong. A good example is that, probably because of media exposure and ‘celebrity founders’, many founders think they should be trying to secure VC funding.
Most don’t know that they just haven’t got a business that VCs will take any interest in – that VCs have some pretty extreme selection criteria. So they waste a lot of time finding the right path. Of course, I would wish every fundraising founder would buy a copy of AngelThink and gain more insights into how to advantage themselves over all other founders. What else? Find a good mentor. Join a founder support group.
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