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.
You are taking a significant risk by backing a business before you have any evidence of success because angel investing occurs very early in the process. You might not even have a product or customers. As a result, the people behind it are arguably the most crucial aspect that needs to be evaluated. Additionally, I hope you already know them.
Products change, businesses fail, and markets change, so the people you're backing will always be the same. You're betting on their perseverance, commitment, and adaptability.
Based on your knowledge and experience with exceptional people and their characteristics, much of this assessment of the founders is based on gut instinct. However, these guidelines can assist you in refining your ideas: • Each founder ought to possess a superpower: They are capable of doing something superior to nearly everyone else. Maybe that means gaining customers for companies that sell consumer packaged goods. Perhaps it's hiring and recruiting engineering teams. It might be developing computer vision applications for mobile apps that use augmented reality. A superpower in and of itself is being an expert fundraiser.
• Each of the founders, particularly the one who will be most visible to the public, ought to strike you as exceptional and unique. You have to be moved by something about them. Although it is difficult to put into words, they must possess a spirit and presence that inspires you to listen and care. They will be able to raise funds, persuade employees to work for them when they have many other options, sell customers, form partnerships, give excellent press interviews, and more thanks to this same presence. There is no one correct way to appear unique; The CEO often comes to mind as the outgoing salesperson, but the introverted technical genius who simplifies complex architecture with witty quips also plays that role.
• The best number, according to the data, is two co-founders. One is tough and lonely, three can lead to a "two-on-one" gang mentality, and beyond four, it's difficult for anyone to make decisions. • In an ideal situation, one founder would be the businessperson and the other would be the technical person (likely the CTO). They will combine their strengths. They are aware that they need to bring in a founder to complement them and are willing to give up the necessary equity to attract such a person if they are all on the technical or business side.
• They have a reasonable response regarding the amount of money they are raising and the manner in which they will use it to accomplish which milestones and over what time frame. Keep in mind that businesses that will be the first in their sector or those with a higher level of complexity require more foresight.
• The founders are driven by a mission. They ought to be deeply concerned about the issue for which they are creating the business. Building a business on the hope that they will become wealthy is not a good idea. They need to be totally focused on coming up with their solution. The narrative would be even better if they had firsthand knowledge of the issue and were motivated to propose an improved solution.
• If they're starting a new industry, they can find competitors or similar businesses that are going in the same direction as them. It's also helpful if they can point to comparable businesses that have successfully exited. • Unselfishness in relation to their equity ownership, particularly in terms of their willingness to accept dilution in order to obtain the required funding or to issue employee stock options in order to attract talented hires.
• They know their way around money. That does not imply that they have made an accurate forecast of their revenues in three years; That can't be done. However, they are able to dissect aspects of their thinking, such as how much they anticipate their customers will be worth, how much it will cost to acquire them, how they anticipate pricing their product, and how they arrived at an estimated burn rate. In meetings, they do not seek these responses from their "finance person."
• The founders have a large amount of domain depth. They are specialists in the field they intend to enter. Assume they are starting a travel agency: Domain depth could indicate that they have worked for other travel companies, that they have a lot of useful contacts in the industry, that they already have a list of potential customers in the travel industry, that they have built API integrations with complicated travel databases, and more. One of the founders has established highly effective sales teams to sell a product with a similar sales cycle if they are starting a B2B company with an expensive product.
• They can think quickly. They are able to respond in a meaningful and thoughtful manner on their feet. • If the company's founders have official advisors, they should be impressive, well-known experts who contribute value in the areas where assistance is required. Most likely, they are not the founder's uncle.
• In their interactions with you as an investor, they are honest, respectful, and prompt in responding to your requests—assuming your requests aren't unreasonable. A healthy relationship between a founder and an investor is built on honesty. • You personally like them. This does not imply that you would be friends with them outside of work or that you gravitate toward them because they are similar to you; rather, it merely indicates that you admire, respect, and trust them, and that you look forward to spending time with them while working on this business.
• They don't have to have started a business before, but the less experience they have as founders, the more success they should be able to show in previous jobs or projects. For instance, a first-time founder with a background as a lead engineer at Google and at a startup that grew from 5 to 400 employees during her time there has a strong profile. On the other hand, a multi-time founder whose previous businesses were all several-person design agencies that never grew beyond 5 employees has a background that is less suitable for a venture-scale company.
• It is likely that the founders operate from the same physical location. An additional obstacle is a distributed founding team. It is possible for it to work, but typically only after the business began in one location and later moved to multiple offices as it grew. However, the majority of investors consider a physically united team to be advantageous. Exceptions: crypto investments in early-stage businesses that outsource their development teams to nations with cheaper workers and where a decentralized platform and business model lend themselves to a decentralized team. Founders' red flags The majority of these are the opposite of the aforementioned benefits, but here they are in case it is helpful:
• Their main motivation is financial gain.
• Untruthfulness intellectual: They lie to you and to themselves about the state of affairs; They will minimize issues and emphasize successes, making it difficult for you to assist them and shocking you when the company's true status is revealed.
• Typical dishonesty: They lie to you about things like the status of their fundraising (they say, "We have multiple term sheets right now," when in fact, they don't) and metrics (they say, "We're growing 50% month over month," when in fact, they don't).
• They are all academics with no prior experience in business. Or, they're all businesspeople who don't know much about technology. • Their day jobs have not been eliminated. • They lack enthusiasm for the concept. • They say they'll do something else in a few years, and they don't think this company will last.
• They act as if there is no competition or are unaware of their rivals.
• They don't take criticism or feedback well, and they talk over you, get defensive, and don't listen. • They send you a cold or generic email that looks like it was copied and pasted. • There are more than four founders, and each of them has an arbitrary, unusual, and typically non-technical title, such as CMO, CEO, COO, or CRO. The majority of the time, you'll see this; They will be MBA candidates.
• They don't communicate well: e.g., late responses, incorrect spelling and grammar, and a deck that is poorly designed and written. The standard for deck creation is determined by the founder's role in the business. An unappealing deck from a design position cannot be justified. Engineers in the back end get a pass more often.
• Any negative personal characteristics or behaviors, such as arrogance, sexism, overconfidence, or low EQ.
• Signs that they are not professionals: They spend a lot of time negotiating minute and unimportant details in term sheets, they ask you to sign an NDA before they pitch you, or they give you a long, complicated business plan (which no investor wants).
• They are raising insufficient funds, indicating that they are unaware of the true costs of starting the business.
• They seem to be very far from where they should be because of their extremely high or low valuation. Keep in mind that even though a low valuation may appear to an investor to be a windfall, if you take on too much ownership, you run the risk of not giving the founders enough of a stake to keep them motivated. Additionally, you might not leave enough equity for future investors to be interested in participating. A very low valuation may also indicate that the founders are ill-equipped to raise money.
• They have an odd cap table structure in which untrained investors, such as family members, hold substantial ownership stakes. reticence when it comes to equity or fundraising; protecting their ownership for their own selfish reasons at the expense of acquiring necessary funds or giving it to important hires.
• They have tried unsuccessfully to raise money for a long time.
• You hear bad things about them from someone you really trust.
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