Investing in Non-Tech Startups: An Angel's Perspective

While the conversation around startup investing often revolves around the most technologically advanced ventures, there remains a significant interest in non-tech startups. This piece delves into the unique characteristics and appeal of these ventures from the perspective of an angel investor.

Types of Ventures and Inclusion of Non-Tech Investments

During my time at Wharton, I conducted some research on the types of ventures angel investors fund. While around 40% of the investments fell into the “tech” category, the other 60% spanned a broad spectrum including healthcare, media, education, and financial services. This means that the majority of angel investors’ investments are primarily in non-technical sectors.

Angels vs. Venture Capitalists: Different Approaches and Risk Tolerances

There are different investor models in the startup world, each attracted to different kinds of businesses. Unlike venture capitalists (VCs) who are looking for outsized opportunities to put large sums of money to work repeatedly, angels have more limited funds to draw on. This necessitates a more strategic approach to where future capital for the companies they invest in will come from.

For angels, the future capital sources might include VCs, strategic partners, or other angels and early-stage investors. This is considered financing risk, alongside technology risk, market risk, and regulatory risk. The ability to manage financing risk is often tied to the cash requirements of the business.

The Role of Cash Flow and Margin Expansion in Angel Investing

One of the key factors influencing angels is the minimal cash requirement needed for a business to stay alive. Growth does not produce cash; it consumes it. Therefore, a business that naturally contributes more to its own survival through higher margins has a lower future financing risk.

Angels seek companies that can make meaningful use of their money, achieving milestones that significantly de-risk the business. Higher margin businesses are more appealing to angels. For example, a web-based business that can quickly iterate and modify its product with minimal resources is highly attractive. Conversely, a business requiring a significant capital outlay to build out a factory and supply chain has higher financing risk.

Industry Comparisons and Capital Efficiency

The nature of the business itself plays a crucial role in determining the amount of cash it will consume during its iterations. A professional services business, for instance, requires more staff as revenue grows linearly, increasing costs. Manufacturing companies, on the other hand, have complex supply chains that require inventory and risks of obsolescence. These businesses consume more capital and thus have lower margins.

Software businesses stand out due to their high margins and scalability. The cost of producing the second copy of a software product is minimal compared to the first. This makes software businesses much more capital-efficient and attractive to angels. Conversely, businesses with tangible products face higher capital costs with each additional unit produced. This makes them less appealing to angels who are looking for maximum returns on relatively limited investments.

Conclusion: The Importance of Capital Efficiency and Margin Expansion

At the end of the day, what matters most to angels is leaving room for error. Industries with straightforward supply chains, such as those in web services, offer more room for error and thus are more attractive to angels. These companies can scale rapidly with big returns on modest capital investments, making them easier to fund through angel investments.

Non-tech startups can still find significant interest and funding from angels who are strategic about their investments. Understanding the unique challenges and opportunities in different sectors is crucial for identifying the right ventures to back.

Keywords

non-tech startups angel investors capital efficiency