Having started several companies, including ones that have failed and invested in many companies at different stages, there are four key factors I look for when deciding to invest in a company.
1. Who is the team and founder?
The quality and experience of the people managing the company are pivotal. Do they have relevant industry experience? Do they have grit? Having grit is very important to me as growing a company is extremely taxing. It is a 24/7 job with lots of demands and stress. They have to be personally invested in the company succeeding. The founders either have to be forgoing compensation or have invested their capital into the deal. My investment is not for their salary but to help grow their business through infrastructure, marketing, inventory, etc. There will be many pitfalls and setbacks while growing the company, and I need to know they will persevere through the adversity. If it is a team, I need to know they have diverse experience and backgrounds, and they work well together.
2. What is their hook?
Most companies do not succeed, so what makes their idea different? Is the product filling a void in a familiar market? Is the market big enough to make this company scalable to be bought or go public? I find that many founders are trying to service a market that is too small or over-crowded. It will be too difficult to make the company scalable so that the investors can make a significant return. Is there a barrier to entry? I often see great ideas, but if it is too easy for another company to start offering the same product or service, it is not a good investment. What is the companies product or service that makes them different, scalable and sustainable?
3. How do they gain customers?
Customer acquisition is hard really, really hard. I have seen it time and time again, where a company launches with a beautiful website and perfect brand, and unless they have a magic bullet, the company never takes off. Often, newer entrepreneurs believe you can build your business, launch the product, buy some Facebook ads and next thing customers are flooding the website. This is never the case. I do not invest in a company unless they know exactly how they are going to target and obtain their customers. It has to be a known entity. Do they already sell to the customers, or do they have a spokesperson with a substantial social media presence, or do they have an active board that can help grow the company? You get the idea.
4. Assume the worst.
Make sure the capital the company is raising is enough to get them to the next round. Often, founders don’t ask for enough money because they don’t realize how much more time and money it will take, or they don’t want to give up too much equity when the company has a low valuation. You need to assume the worse and make sure you don’t give them capital if you think they will run out in 6 months. Because at that point, you will have to invest more money to keep the business going or walk away from your initial investment. Besides, I usually don’t like being the only person investing in a deal, so it is not just me covering the gap. Angel investing can be very rewarding, but there is also considerable risk. To invest in a company that early in the start-up phase you need to listen to your intuition, do lots of research, and be willing to lose the money. Do not invest your life savings in an angel investment.