“If you can’t invent the future, the next best thing is to fund it”

- John Doerr, Kleiner Perkins

But today, venture capitalists have become more risk-averse and have shifted their focus to late-stage funding, leaving a void where smart capital and mentorship is needed to grow an early-stage business successfully.

This is where angel investors come in, contributing their own know-how, providing mentorship, and sharing their connections with the businesses they invest in. They are thus the main drivers of innovation and the natural leaders of the world’s early-stage investment markets and take up a critical position in the start-up ecosystem.

But how do angel investors choose the right deals to invest in? Well, according to a research conducted by CB Insights (August 2020), 70% of start-up tech companies fail, usually 20 months after the first round of financing. Therefore, an understanding of why more than 50% of the start-ups fail is crucial to angel investment. Moreover, how can angel investors avoid such failures and more specifically manage them?

In this blog, we wish to give you an introduction to what you could consider if you are thinking about diving into this (very exciting and rewarding!) field.

Well it turns out that there are certain qualitative and quantitative metrics that angel investors could use to evaluate investment prospects, and they generally fall into three categories:

• People
• Product
• Market

1. People:

Entrepreneurial ideas are abundant, but entrepreneurs who can actually execute such ideas in the face of difficult times are uncommon. For most investors, the people behind the business are more important than the idea itself. It’s one thing to have a great idea, but another to have the experience and business skills to execute it. Angel investors wish to see people who can handle the pressure and experienced investors know all too well that it’s the determination and the resourcefulness of an entrepreneur that gets a business through such inevitable hard times.

Then what should you, as an angel investor look for? Here are a couple of points that you could consider:

An entrepreneur who knows his strengths and weaknesses and a team which is open to feedback, constructive criticism and to a degree, is coachable and adaptable
Team harmony, well-defined roles, shared goals and objectives within the team
Key team members with complimentary skill sets that fill every management need that the start-up requires
 
2. Product:

The second pillar of the decision-making process points to the product and the start-up itself.

Will the solution being proposed by the start-up succeed in the market? Will it be adopted? What stage is the solution at? Typically, the founders’ answers to these questions should help you make a decision.

But here are some points that you could consider as well:

A working solution in the form of an MVP (Minimum Viable Product) or prototype, as the execution of a working MVP at this stage is fundamental
A research about the competition and if the solution is easily replicable or not – a product that is relatively hard to copy and which offers a much better solution than the existing ones
Test the assumptions behind the revenue and growth rather than the final projections as the unit economics will tell you a much granular story of the product
 
3. Market

The main reason for a start-up to emerge is that there is a specific problem that its founders deem necessary to solve. So how real, urgent or painful is the problem that they are looking to solve? Is there a market for the solution and will people be willing to pay for it?

Here are a few factors that you could consider:

Understand founder’s plans for growth and scalability which is crucial for an investment to yield good returns over time
The market economics need to convey the size of the addressable market, the true accessible market as well as the strengths and weaknesses of other players in the market
The channels that the start-up would use to market and sell new products in order to earn multiple streams of revenues
 
Well, you may believe that this is a great way to sift through hundreds of companies to find a few diamonds in the rough, but most investors would also need to apply a second level of filter in their screening process, i.e.

Potential – How big is the potential theoretical exit?
Probability – How likely will the start-up achieve break-even success?
Period – How long are you likely going to have to wait?
 
Therefore, as an angel investor, be smart, take calculated risks, understand the problem and the solution, believe in the team and their execution capabilities and help the start-up get to the next stage of funding!

If you found this blog interesting, do let us know in the comments section below or write to us at reeshel@angivestventures.com

Your feedback is much appreciated.