What are the three things angel investors should deep-dive on pre-investment? Darren Mulvihill shares his thoughts on the matter.
The Promoter The promoter or in other words the CEO; do you believe they will carry through on what they are planning and are they dynamic enough to deal with the hurdles and setbacks that the route of entrepreneurship will throw at them?
A crucial element in revealing the character of the CEO is by looking at their past activities, this is most accessible through LinkedIn and AngelList. However, it is important to remember that those online profiles are what those individuals want the world to see, they may not necessarily be the truth.
Consequently it is always worth doing external offline research before investing, this could include talking to past colleagues and employers, speaking to previous external investors etc. This should give you a far more rounded perspective of the individual you are looking to invest in.
Darren Mulvihill and Patrick Collison (Stripe) at Startup Grind 2013
Market The golden question that is on the lips of every VC. Quite simply is the market large enough that the businesses operating within it will generate significant exits?
VC’s generally consider ‘large’ to be $1bn+ and as angel investors we are looking for a 50-100x increase in valuation. However, significant gains can be found in smaller markets, where fewer companies have a larger market share.
It is also important to consider the potential for the company to raise VC funding, this can be a good exit for original angels looking to make a return. Similarly, if you are looking to hold onto your equity, it is indicative of momentum in your investment. Russ Hahnemann from the renowned sitcom Silicon Valley emphasized the importance of the $bn market with his famous, 3 comma club!
Competition Is the market extremely crowded? If so, then we as angels must look for a great product or service with a competitive edge.
If the company is not providing a compelling and better service or product to the market, it is not an investable opportunity. We must also consider the rather heavily used but important word, ‘innovation’. Is the company innovating sufficiently in the market that it can attain a large market share before its subsequent competitors can.
As an angel, the rewards of a spectacularly successful investment can be ruined by several money-losing investments. So before putting money into an opportunity, take the time to really examine the founding team and the competitive market, in which they are about to enter. As Benjamin Franklin stated, ‘by failing to prepare, you are preparing to fail’.