Angels invest in the wide range industry, from brand new to up to 2 years old companies which need significant capital to grow. They know for fact that every investment has risks, especially the risks in the early stage deal that relatively having technological risk, product/service risk, market risk, sales risk, competitive risk, financial risk, operating risk, people risk…However you can mitigate that risk by asking the right questions and doing assessment which companies to invest in. As said Susan Preston, an educational instructor for the Angel Resource Institute and a successful angel investor, “your job as an investor is to evaluate the risks.”
To make their own money decision, the angels collectively on their networks for assessing and valuating. There are much insights and advices from Winning Angles: The Fundamentals of Early Sage Investing – which offered may ways to be more productive in doing your due diligence:
- The people are the most important who are evaluating a company. “The people in the deal including the entrepreneur, team members, investors, advisors, and any significant stakeholders.” Is the company led by the experienced, skilled, knowledgeable team? Are they enjoyable to work with? Do they have passion, enthusiasm, and good networking? The management team are the really matters as many angels said the find the best companies because they found the best people to work with.
- The business opportunity: The potential opportunity, which includes the business model, the size, the customers, and the window within which it can be seized.” Most angels start by investing in industries that they are familiar with, and stick with the people they know who have investment strategy that fits their preferences. It is important for any investors who are looking for a better chance of return on investment – the company that has an exit strategy from start. “Winning investors know that entrepreneurs who are highly motivated to exit are more likely to get it done.”
- The context: includes many major factors including economy, technology, regulation, competition etc., It is important to identify and consider if these factors support or hurt the venture. Essential point is having a realistic business plan and financials with a clear path to profitability. This will require of salable products that create long term potential customers in market conditions, of keeping down the expenses while building good margin and grow in revenues that align with their strategies and contexts.
- The deal: includes the structure and the price. It is when you negotiate or take it or leave it decision.
Amis, D. and Stevenson, H. Winning Angels: The 7 Fundamentals of Early Stage Investing. Pearson Education Limited, 2001.