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?