Combining Preston’s insights with my own research and comments from angels across the country, I’ve compiled the top seven factors for assessing which companies to invest in:
1. The company is scalable. This means the company can grow quickly in revenues, while expenses are kept down, building a good margin. Some business models work great for this, while others that require considerable personnel may not. A common example of a scalable business is the manufacturer of a razor which needs a lot of razor blades that are low-cost to make and sell, while a company that requires lots of customization or expert time in installation or consulting is not as scalable.
2. The company is attractive to potential acquirers. Many corporations that acquire innovative ventures are looking for high growth, scalable companies with great margins and products that align with their strategies. It is important for the company to have an exit strategy from the start, and for investors to understand who is likely to buy them, why these buyers would be interested and the anticipated timeline to acquisition, among other considerations.
3. The potential exit provides the return you need. Every potential exit comes with a return calculus based on a combination of how much you invest, the pre-money valuation, how much of the stock the investor owns, and the acquisition purchase price. So it is important not only to have an idea of how much the company might be sold for, but how much money you invest and whether additional investment rounds might dilute your ownership percentage. If I am looking for a 10X return on my investment, one way to increase the chance for a bigger return is to work with a company that isn’t likely to require a lot of additional capital. That way I can more easily understand how much the company needs to sell for in order to hit my return target. Of course all of this is “in theory,” since exit predictions are rarely accurate (wouldn’t it be great if they were?).
4. An excellent management team. Investable companies are led by solid management teams with experience, knowledge and complementary skills, along with the ability to build a great culture as the company grows. While many angels prefer teams with previous entrepreneurial experience, some enjoy working with first-time entrepreneurs who have tremendous enthusiasm and energy and also surround themselves with experienced insiders and senior advisers. The team needs a realistic business plan and financials with a clear path to profitability.
5. The product is validated by customers and meets other criteria. One of the biggest things to determine when considering an investment is “who is going to buy this product?” Investors need to talk with customers or potential customers to validate that they plan to buy it. Does it solve a major problem or pain point for them? And how does this product compare to the competition? The company should be able to easily communicate why their product is better than their current or future competitors. There are also a host of other issues to consider, from intellectual property to manufacturing. Make sure a realistic product road map exists and that true costs of production and delivery are well thought through.
6. A large market and strong go-to-market strategy. Make sure the addressable market is big - $500 million, not $5 million – for a better chance at revenue growth. And confirm a clear market strategy. Who are their partners? What is the process to get to market? Ask about the length of the sales cycle, which is often longer than entrepreneurs think. How do the market and product work together? As an example Preston says when she first started investing in clean energy, she thought people were going to buy green because it was the right thing to do. “Not true at all. No one is going to do that unless it’s priced competitively and there’s a compelling bottom-line reason to do it,” she says.
7. The opportunity fits your personal preferences. Choosing a company is a personal decision and over time angels develop their own weighted list of attributes to look for. Most angels start by investing in industries they are familiar with. Others consider geography, growth stage, amount of capital needed, and many other factors. It may be that no two angels are alike – but the best ones have an investment strategy that fits their preferences.