There’s no shortage of advice out there for angel investors looking to make sound investments in the growing startup space – both inside and outside Silicon Valley.
If you’re looking for advice on reading balance sheets or performing the most accurate valuation possible, you’ll have no trouble finding an expert source that will lead you down the right path.
However, when it comes to being scammed – lied to, knowingly or otherwise – it’s hard for an angel to know how to approach their investments smartly. Particularly if you’re new to angel investing.
How NOT to lose your investments
Here are 6 tips to keep in mind to make sure you end up on the winning end of the deal instead of losing everything you’ve invested:
1. Perform a market assessment before meeting the startup team
Before you meet with the startup owners, check out the market they operate within very thoroughly. Some angels like to go into pitch meetings without any bias whatsoever; preferring to listen to what the team has to say rather than letting their judgment be obscured by the facts. This isn’t the smart way to do things.
Let your gut tell you what to do regarding the final investment decision, but always keep in mind nobody can sell products to a non-existent market!
Look for:
- An obvious pain point, want, or need the product solves – no market exists for a product or service without this.
- Do a lot of people use the product, or is there a huge segment crying out for it?
- Is it a niche market – if so, is there a limit to scalability?
- Who is the ideal customer and where do they live?
- Is the product a one-time or recurring purchase?
Sometimes the answers to these questions will be an immediate deal-killer. Other times, after meeting with the startup, you may note they’re unaware of the product’s potential, and you may be able to coerce a better deal for yourself (ie., more equity, convertible note deal, etc.)
2. Bet on the jockey, not the horse
Gary Vaynerchuk always says in his keynotes and content that investors – especially those dealing with early stage businesses – should “bet on the jockey, not the horse”; what he means by that statement is that no matter how cutting-edge is the concept and how big is the potential, without proper execution those are rendered useless. So, instead of investing in ideas and potential, you should consider focusing on investing in the founders – starting from choosing the ones who possess the right set of traits.
Research about the founders; “spy” on them on social media and see how they engage others. You might be surprised that you can learn a lot about someone just by observing what they do on socialsphere.
3. Find and use a reliable network
An angel, or any investor for that matter, is nothing without a strong network of professionals behind them. You need to always focus on building a bigger, stronger network of investment professionals you can call on whenever you need them for help or advice. Investors, business experts (marketing, accountant, retail, eCommerce, etc.), and industry professionals from all walks of life, will be essential to successful investments.
Otherwise, you’ll be making blind investments in industries you know nothing about. Essentially counting on the word of those you’re investing in without getting any unbiased advice. And what if you need some advice about a questionable opportunity?
Who will you call? You need an answer to that question. At least know someone who knows someone. That’s how smart investors make sound investments.
4. Due Diligence
This can be the hardest and most arduous part of the investing process. Having a network of professionals at your disposal is critical to this process. You’ll want a business accountant for sure. You basically want to assess the business in the same way you would if you were buying it.
Since we’re talking about startup investing, it’s a given that some things just won’t line up. However, you need to have the entire picture in front of you before letting your gut decide if you want to get into business with the founders or not. This Quora discussion has lots of helpful advice and links to resources for doing D.D. the right way.
5. After investing: Insist on timely updates
You’ll want updates at least every month, if not on a weekly basis when things get moving. It’s simple: if you don’t know what’s going on, things can spiral out of control quickly.
You don’t want to find out the startup you’ve invested your time and money into took a blind turn when you get an email saying they’re closing the door due to bankruptcy. Or have them hitting you up for more money because some hair-brained, expensive marketing they tried failed.
6. Practice the fine art of diversification
Never put all your eggs in one basket. In the case of angel investing, this means not investing all your money into one or even a few select companies, and not sticking to just one vertical. Sure, invest in technology if you like, but don’t put all your money into automation solutions for industry or mobile apps.
Spread yourself out, so if one industry flops you have several other profitable ventures to fall back on.
Follow these 5 angel investing tips and you’re still not guaranteed to make money on your deals, but you’ll definitely help reduce your losses.
