Evaluating an Angel Investment

With startups in vogue for many years now, more people are becoming first-time angel investors (“tourists” is the parlance for angel investors that come and go). A number of would-be angels have asked for advice when evaluating an angel investment.

Here are a few thoughts:

  • Team – At this stage, it’s 70% the team. Are they resilient? Will they grind it out? How resourceful are they? Most entrepreneurs don’t have the necessary grit.
  • Idea / Market – At this stage, it’s 30% the idea / market. Is it a small, fast growing market? Is it resegmenting an existing, large market? Great ideas in great markets are key.
  • Timing – The ideal timing is 2-3 years before mainstream adoption. Being too early is a failure. Being too late is a failure.
  • Pro Rata – Investors are commonly granted the right to participate in future financing rounds based on their percentage ownership. Angel investors should plan on reserving $2 for every $1 invested (e.g. invest $100,000 initially and then have another $200,000 ready for future rounds to participate pro rata).
  • Next Round Likelihood – Raising an angel round is one small milestone in a long journey. What are the chances the startup can raise money in 12-18 months at 3x the current valuation? Most startups require multiple rounds of financing.

Evaluating an angel investment is very subjective. With limited metrics and operating history it’s a bet on the team and market. Remember that angel investing should be viewed as charity and most angel investors never make money even after doing a number of deals.

What else? What are some more thoughts on evaluating an angel investment?

3 thoughts on “Evaluating an Angel Investment

  1. Spot on David. Especially the point about angel investing should be viewed as charity and that most angels never make money at it. Family and friends investors should remember this before doing a deal.

  2. I wish the “angels” I have known also knew the word or concept of charity. Having been down that road multiple times, dozens of times, it seem more like a cover word for devil.

    The entrepreneur needs to protect themselves from overly controlling angels with huge demands on equity shutting out expected future rounds that will be needed if the project moves forward.

    I like this article’s perspective and would love to work with this kind of truly angel investor types that have the resources yet understand the risk and are still ok with that provided the product, team and market are worthy.

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