Because angel investing happens at very early stages, you're taking massive risk to back a company before you've seen any evidence of success. You may not have customers or even a product. Thus arguably the most important piece you have to evaluate is the people behind it. And hopefully you know them already.
Products pivot, companies flounder, and markets change, so the one constant will be the people you're backing. You're betting on them to be tenacious, dedicated, and adaptable.
Much of this assessment of the founders is gut instinct, based on your knowledge and experience with exceptional people and their characteristics.
But these guidelines can help you hone your thoughts:
• All of the founders should have a super power: they can do something better than almost anyone in the world. Maybe that's acquiring users for consumer packaged goods businesses. Maybe it's recruiting and hiring engineering teams. Maybe it's building computer vision applications for augmented reality mobile apps. Being an expert fundraiser is a super power in itself.
• All of the founders, especially the one who will assume the most public-facing role, should strike you as exceptional and special. There has to be something about them that moves you. This is hard to put into writing, but they have to have a spirit and presence that compels you to listen and to care. This same presence will be what allows them to raise money, convince employees to work for them when they have lots of other options, sell customers, build partnerships, give great press interviews, and more. There is not one right way to come off as special; the extroverted salesperson CEO often comes to mind, but the introverted technical genius who breaks down complicated architecture into simple quips fills that role too.
• The data suggest that two co-founders is the best number. One is lonely and tough, three can create a "two on one" gang mentality, and four and beyond makes it hard for anyone to make decisions.
• Ideally one founder (probably the CEO) is the business person and the other is the technical person (probably the CTO). They will play off each other's strengths. If they're all on either the business or the technical side, they understand that they need to bring in a founder to complement them and are willing to give up the requisite equity to attract such a person.
• They have a reasonable answer on how much money they're raising and how they will spend it to achieve which milestones and over which period of time. Note that this foresight is harder in more complicated businesses or those that will be the first in their category.
• The founders are mission-driven. They should care deeply about the problem they're building the company to solve. Believing they'll get rich is not a good reason to build a company. They need to be obsessed with creating their solution. The story is even better if they've personally experienced the problem and were driven to provide a better way to solve it.
• They can identify competitors, or if they're creating a new industry, analogous companies that share similarities to the path they intend to take. It's also valuable if they can identify analogous companies that have had positive exits.
• Non-selfishness regarding their equity ownership, especially around willingness to take dilution to raise necessary funding or to create employee stock options to recruit talented hires.
• They have a command of their economics. That doesn't mean that they correctly predict what their revenues will be in 3 years; no one can do that. But they can deconstruct their thinking around things like how valuable they expect their customers to be, how much it will cost to acquire customers, how they expect to price their product, and how they arrived at an estimated burn rate. They don't turn to their "finance person" in meetings for these answers.
• The founders have rich domain depth. They are experts in the industry that they plan to enter. Let's say they're starting a travel company: domain depth here could mean that they've worked at other travel companies, have many valuable contacts in the industry, have a list of potential customers in the travel space already, have built API integrations with complex travel databases, and more. If they're founding a B2B company with an expensive product, one of the founders has built high-functioning sales teams to sell a product with a similar sales cycle.
• They are quick thinkers. They can produce meaningful, thoughtful responses on their feet.
• If the founders have official advisors, they are impressive, well-known experts who add value in the areas in which the company needs help. They're probably not the founder's uncle.
• They're straightforward and respectful in their interactions with you as an investor, being honest, responding quickly, and being transparent with your requests (assuming your requests aren't unfairly demanding). Honesty is the basis of a healthy founder/investor relationship.
• You like them personally. That doesn't mean you'd be friends with them outside of work or you gravitate to them because they're similar to you, but that you admire, respect, and trust them and look forward to spending time with them on this business.
• They don't need to have founded a company before, but the less experience they have as founders, the more success they should be able to demonstrate in their past jobs or projects. E.g., a first-time founder who was a lead engineer at Google and at a startup that scaled from 5 to 400 people while she was there has an excellent profile, whereas a multi-time founder whose past companies were all several-person design agencies that never grew beyond 5 people has a less appropriate background for a venture-scale company.
• The founders most likely work out of the same physical location. A distributed founding team is an added challenge. It can work, but typically after the company started in one place and then expanded to multiple offices as it grew. Still, most investors view a team that's physically together as a plus. Exceptions: crypto investments where a decentralized platform and business model lend themselves to a decentralized team, and very early companies who outsource their development teams to countries with cheaper workers.
Red flags on founders
Most of these are just the reverse of the positive characteristics above, but here they are in case it's helpful:
• They're in it mostly for the money.
• Intellectual dishonesty: they aren't honest with themselves or you about how things are going; they will minimize problems and play up successes, making it difficult for you to help them and shocking when the true status of the company becomes clear.
• Regular old dishonesty: they lie to you about facts like fundraising status ("we have multiple term sheets right now" when they don't) or metrics ("we're growing 50% month over month" when they're not).
• They're all from academia with no business experience. Or they're all business-oriented without any tech abilities.
• They haven't quit their day jobs.
• They don't seem passionate about the idea.
• They refer to doing something else in a few years and don't see this company as long-term.
• They aren't aware of their competitors, or act as though they don't have competition.
• They don't take feedback or criticism well, including talking over you, getting defensive, and not listening.
• They get to you via a cold and/or unpersonalized email that looks copied and pasted.
• There are 4+ founders and they all have arbitrary, unusual, usually non-technical titles, like seeing a CRO, CEO, COO, and CMO. Ninety percent of times you see this; they'll be MBA students.
• They aren't good communicators: e.g., delayed responses, bad grammar and spelling, a poorly designed and written deck. The bar for deck creation depends on what the founder's role is in the company. There's no excuse for someone with a design role to put out an ugly deck. Backend engineers get more of a pass.
• Any personal traits or behaviours that strike you as negative, like overconfidence, rudeness, sexism, or low EQ.
• Signs that they are amateurs: they spend a lot of time negotiating minor and irrelevant details in term sheets, they ask you to sign an NDA before they pitch you, or they give you a wordy, multi-page business plan (no investor wants these).
• They're raising too little money, which shows that they don't understand the realities around how much cost it'll take to build the business.
• They have an extremely high or low valuation that strikes you as very far from where it should be. Note that a low valuation may seem like a windfall for an investor, but if you're taking too much ownership, you risk depriving the founders of enough of a stake to keep them motivated. Plus, you may not be leaving enough equity for future investors to want to get involved. A really low valuation may also suggest that the founders don't know how to fundraise.
• They have a strange cap table makeup, with unsophisticated investors like family members holding significant ownership stakes.
• Stinginess around equity or fundraising; selfishly protecting their ownership at the expense of bringing in needed funds or giving it to important hires.
• They've been fundraising unsuccessfully for a long time.
• You get a negative reference on them from someone who you really trust.
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