7 Factors For Deciding To Invest In A Startup -- Or Not

Combining Preston’s insights with my own research and comments from
angels across the country, I’ve compiled the top seven factors for
assessing which companies to invest in:

1. The company is scalable.  This means the company can grow
   quickly in revenues, while expenses are kept down, building a good
   margin.  Some business models work great for this, while others that
   require considerable personnel may not.  A common example of a scalable
   business is the manufacturer of a razor which needs a lot of razor
   blades that are low-cost to make and sell, while a company that requires
   lots of customization or expert time in installation or consulting is
   not as scalable.
   
   
   

   
   
   
2. The company is attractive to potential acquirers.  Many
   corporations that acquire innovative ventures are looking for high
   growth, scalable companies with great margins and products that align
   with their strategies.  It is important for the company to have an exit strategy from the start,
   and for investors to understand who is likely to buy them, why these
   buyers would be interested and the anticipated timeline to acquisition,
   among other considerations.
3. The potential exit provides the return you need.  Every
   potential exit comes with a return calculus based on a combination of
   how much you invest, the pre-money valuation, how much of the stock the
   investor owns, and the acquisition purchase price. So it is important
   not only to have an idea of how much the company might be sold for, but
   how much money you invest and whether additional investment rounds might
   dilute your ownership percentage.  If I am looking for a 10X return on
   my investment, one way to increase the chance for a bigger return is to
   work with a company that isn’t likely to require a lot of additional
   capital.  That way I can more easily understand how much the company
   needs to sell for in order to hit my return target.  Of course all of
   this is “in theory,” since exit predictions are rarely accurate
   (wouldn’t it be great if they were?).
4. An excellent management team.  Investable companies are led
   by solid management teams with experience, knowledge and complementary
   skills, along with the ability to build a great culture as the company
   grows.  While many angels prefer teams with previous entrepreneurial
   experience, some enjoy working with first-time entrepreneurs who have
   tremendous enthusiasm and energy and also surround themselves with
   experienced insiders and senior advisers. The team needs a realistic
   business plan and financials with a clear path to profitability.
5. The product is validated by customers and meets other criteria. 
   One of the biggest things to determine when considering an investment
   is “who is going to buy this product?”  Investors need to talk with
   customers or potential customers to validate that they plan to buy it. 
   Does it solve a major problem or pain point for them? And how does this
   product compare to the competition?  The company should be able to
   easily communicate why their product is better than their current or
   future competitors.  There are also a host of other issues to consider,
   from intellectual property to manufacturing.  Make sure a realistic
   product road map exists and that true costs of production and delivery
   are well thought through.
6. A large market and strong go-to-market strategy.  Make sure
   the addressable market is big - $500 million, not $5 million – for a
   better chance at revenue growth.  And confirm a clear market strategy. 
   Who are their partners?  What is the process to get to market?  Ask
   about the length of the sales cycle, which is often longer than
   entrepreneurs think.  How do the market and product work together?  As
   an example Preston says when she first started investing in clean
   energy, she thought people were going to buy green because it was the
   right thing to do. “Not true at all.  No one is going to do that unless
   it’s priced competitively and there’s a compelling bottom-line reason to
   do it,” she says.
7. The opportunity fits your personal preferences.  Choosing a
   company is a personal decision and over time angels develop their own
   weighted list of attributes to look for.  Most angels start by investing
   in industries they are familiar with.  Others consider geography,
   growth stage, amount of capital needed, and many other factors.  It may
   be that no two angels are alike – but the best ones have an investment
   strategy that fits their preferences.

7 Factors For Deciding To Invest In A Startup -- Or Not