I was interviewed for an article on angel investing, and I thought you might want to see my full responses. Will let you know when the article appears.
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Q: How did you become an angel investor?
I began my angel investing career in 2005, when I invested in a friend's business. Since then, I've made a series of angel investments in technology companies. My typical modus operandi is to be the first outside investor in an emerging startup. If the company is already established, it's hard for normal angel investor to get in a deal; the key to getting the best deals is to get there first. Once I'm invested, I help the entrepreneurs position themselves and raise their first institutional round.
Besides the monetary benefits, angel investing has helped me get plugged even deeper into the startup ecosystem in Silicon Valley, and gives me access to far more information and dealflow than were I simply an entrepreneur.
Q: What's the smart way for a startup owner to approach an angel investor in
this tough climate?
The smartest way is to get an introduction from a successful entrepreneur. The next best is to get an introduction from another investor. The final way is to read that angel's blog/Twitter output, get to know him or her, and approach him with a highly customized pitch.
Q: What do angels look for in making decisions?
I can only speak for myself, but the two things I look for are great technology and determined entrepreneurs. I don't mind if the company has no clear business model; if the company can create value, I can help them find ways to harvest it. I don't do a lot of financial analysis or market estimates; I prefer to focus on opportunities where the value and upside are plainly obvious.
Q: Biggest three mistakes owners make?
First-time entrepreneurs always underestimate the amount of time it takes to raise money. Even when an investor says, "I want to invest," that's just the start of the process.
Entrepreneurs also have difficulties evaluating their businesses objectively. You have to be passionate about your idea, but you also have to be able to take an honest look at your product and say, "Here's how it needs to get better," not "Why can't people see what I can see?"
Finally, entrepreneurs shouldn't bother raising money before they have real traction in the marketplace. If an entrepreneur doesn't have the chops to get a prototype built and launched without raising money, he or she won't do much better when the money is there.
Q: What's the typical amt you or angels invest?
A typical angel investment ranges from $25K to $100K, though the full range is anywhere from $5K to $500K. Individual angels like me tend to invest less; microfunds like Jeff Clavier's SoftTech Ventures tend to invest more.
Q: How hands-on should owners expects angels to be?
I always describe investors as "employees who give you money." Certainly, some angel investors get meddlesome, but this is typically because the entrepreneur hasn't done a good job of providing transparency and homework. Keep your investors briefed on your progress, and let them know in very specific terms how they can help, and you won't have problems.
Q: how do owners know if there's a good fit?
Ideally, you should talk with other entrepreneurs an angel has invested in. It's hard to tell just from a few conversations how an angel goes about his or her business. Personality fit is probably more important than industry expertise.
Q: what happens if the relationship sours?
Angels don't have a lot of recourse, but if they are well-known in the venture community, you should expect the VCs to ask them their opinion. You should try to avoid antagonizing your investors.
Q: any kinds of businesses that simply aren't suited/appropriate for this
kind of investment?
Angel investments tend to be small, which means that capital-intensive businesses simply don't work with this model. You can't angel fund a semiconductor factory.
Q: what else should I know that I haven't asked?
Those are good questions! The last guideline I would provide is this: Don't bother raising money from angels unless you need at least $250K, but less than $1 million. Below $250K, and it's not worth the hassle. Above $1 million, and you should be raising VC.