Choosing the RIGHT Companies for Investment
There are a myriad of reasons Angel Investors choose to invest. Some are looking for the best return on investment and hoping for the highest margin, choosing companies based on their profit potentials. Other Angel Investors are interested in sharing their expertise and helping entrepreneurs and founders achieve their vision. These individuals are drawn to the community of the start up ecosystem staying involved and aware of the newest technologies and methodologies. Finally, some Angels practice Socially Responsible Investing, focusing on investments made for the “greater good”, investing in causes and technologies that stand a chance to help make the world a better place.
Regardless of the reasons for investing one thing is clear, the end goal is to see a return, in an ideal world that return would be 8-10x the investment, so how do we do that? How are you choosing the companies to invest in?
At a basic level, Angel Investors keep 3 considerations in mind while evaluating a potential investment, these are Potential, Profitability and Period. What is the potential of the exit? Is the management team one that is open to coaching and thus has the ability to achieve greatness. What’s the probability of the company becoming a huge success and, finally, Period. What is the timeline for the return – how long are you going to have to wait to realize the earnings?
Research shows most Angel Investors will stick to investments in an industry they are familiar with. This is a sound strategy for your investments for a few reasons; you’ll be better able to help guide the founding team and provide your expertise, but you’ll also have a keener sense of the need for the product or service, and an understanding of “fit”. You’ll be in a position to understand the technologies behind the product or service as well as the market and go to market strategy.
One of the benefits of joining a network is the ability to broaden your wingspan. Trusting fellow members and their expertise results in a portfolio that may reflect several industries and attain greater asset diversification.
In a recent article entitled, “Unfollow the Leader” (http://bit.ly/2ojV4qI), Propel(X) released the result of their survey in collaboration with other innovation advocates, including Breakout Labs, the MIT Alumni Angels of Northern California, and Innovation Node – Los Angeles, a national node of the National Science Foundation Innovation Corps Program. They surveyed an array of angels and found how Angels make their investment decisions.
In the survey almost half (48.72%) of those questioned stated that they focused solely on the potential for returns when choosing companies to invest in. However an impressive 74. 85% of Angel Investors reported that the management team was the most important factor in deciding to invest in a company, and finally 52.15% felt that they needed the ability to understand the industry technologies.
Based on these results it seems “The priority for Angels proved to be the potential of supporting a driven startup management team with the power to change the world.” Or if not the world at least our bank accounts.