How do Angel Investors Assess Early Stage Start-Ups?
I have been at the forefront of listening to interesting pitches from Founders during Demo Days or Investor Pitch Days. They are a new breed of Entrepreneurs that have the courage to identify problems and initiate solutions. It’s never easy to start something new, work extremely hard and sell the model to Investors, early stage VCs (Venture Capitalists) and other key stakeholders.
However, beneath the excitement and hype lies the question of commercial feasibility and long term business sustainability. In other words, practicality triumphs idealization. The average duration of a successful start-up, to be stable and scale up is 7-10 years – and out of 10, 9 will fail. This means a typical Angel Investor will lose everything at some point. To mitigate the risks, most investors will place a stronger emphasis on Founders. They are the brain and wheels to make things work.
And I thought it’s good to share a few pointers on the evaluation of Founders (yes, coming from a real Angel Investor perspective). For me I put a strong 70% weightage on Founders.
Is the Founder working alone or have a set of people who have complementary skill sets and experiences? For example, one is a Software Developer, another is a Finance person and the third is a Marketer. Having diverse abilities in a team breeds inter-exchange of ideas which are important in the early stage. Is the Founder also working full time in the start-up or part-time? Is he managing just one start-up or multiple? The key here is focus, focus, focus……
Has the Founder exited other start-ups before? This can be a plus point. He knows how to build a business to sell and exit, from a 3x to say a 30x earnings multiple!
Founder has been a Star Performer in their previous jobs? Check out their LinkedIn page, get testimonials and awards if any.
If Founder and their team of people have worked in large multinationals or other companies that belong to the same industry – average 5 years experiences – to me, this will be a great start. Industry people will know the inside-out of what make things tick, including valuable contacts to open doors.
Education qualification. Doesn’t matter if one is just a high school dropout right? Agree. Then, how many out of 100 can you find that belong to the same way of thinking as Jack Ma? Very hard. So, to better work out your chances – probably it’s better to find one who is an MBA graduate from Havard or other reputable institutions who equip students with real life knowledge. But I’ll put this at lower end of my assessment. Simply because a Founder can have an eccentric way of thinking with just basic education background - but his execution turns out to be the ultimate winner.
So I will go on to my next criteria.
How often can an Angel Investor find a Founder who gets to the root of the problem and knows how to turn this idea to be business ready, revenue generating with high user base? Having someone who has the technical knowhow such as route to market, understand the application of continuous lateral monetization of users can align with Investors’ long term objective of getting lucrative ROI.
For example, if my business is a blogshop selling clothes only and the first stage is to acquire a user base, the first point of sales is just consumer purchases. But if my blogshop does that only, there won’t be multiple sales per user. To investors, they look out for high GMV (gross merchandise value). Hence, I can offer name printing services, resale of clothes on demand and work out partnerships to supply unique logo designs (copyrighted) to clothing retailers. Or acquire licensing rights to sell online for some overseas brands provided the margins make sense. That’s being business savvy – and investors like me like to know the Founders' back end commercial thoughts.
Hard to quantify over the first meeting, multiple catch-ups over coffee may help the Investor understand (maybe 90%, ok I am being modest) the underlying motivation behind the start-up. Maybe there is a personal experience which he faces in the past; therefore he is driven to solve the problem, to make other realize the wholesome benefits of having his service/product.
I will think the words, phrases used with the Founders’ body language such as eye contact will help to put me into a good position to know if this is the man that truly believes in self-motivation and of course the acceptance of failure and bouncing right back to business with a stronger urge to win.
The way they think about issues and how to go about doing and finding multiple solutions are signs that they are strategic. The don’t just look at a problem, they deep dive. They create “what-if” scenarios. Therefore, there are overly optimistic, neutral and highly pessimistic scenarios, containing facts and conclusions drawn from it. They know what levers to pull to assess it.
I label this as the hardest. It’s different for every story and not all has the aptitude to look at things objectively unless it’s within their circle of competence. Even so, it depends on the Investor's attributes. But if the Founder has it, that’s another bonus!
In Conclusion….Angel Investor like me has a fluid way of looking at Founders. The factors above build my personal framework. My weightage of 70% serves as a beacon though this evolves from sector to sector. Some needs 70% while others may need just 60%. The key here is, to analyze holistically and be comfortable with the Founder in a platform of shared values and vision of the business. After all, if it's a direct equity round or Convertible Note, the Investor will be a lifelong Cheerleader to the Founder (maybe till Series B), supporting his journey of entrepreneurship.