How To Be An Angel Investor

As an angel investor or venture capital investor, you are always looking for the next big investment. In our current environment, as always, there are many deals looking for seed capital.

Most of us who qualify as accredited investors or qualified investors know, that most of these venture investments will fail. How do you choose the next big angel investment?

Here are a few things to look for:

You want people who are totally dedicated to their business, not those who are trying to make a fast buck on the latest fad. If they have the company logo secretly tattooed on their arm, they are for you. If they say things like If this tech thing doesnt work, I can always go back to truck driving then run! Your team must be willing to take those strong pains that are the growing pains of a small business.

One thing that is always a turn off the deal offered to the investor is one-sided. Lets face it, in almost all startups seeking seed money, the proposition boils down to With our brains and your money, what have we got to lose? The investors should get a big enough piece of the company that if it wins, they win big, because most startups seeking see money will fail.

Granted, deals that favor the investor de-motivate the entrepreneurial team and are also to be avoided. The company should give the investors a chance to take over if the company fails. Most investors wont want to, and even if they do, there is likely to be nothing to salvage, but give them a prayer.

The company must offer a fair deal. I find that valuing companies seeking venture capital, particularly if they are startups, is very hard. Only hindsight can tell you what the value is. However, it is easy to see that you should get an expert to tell you what the investor expects.

Seed money investors are looking for character in management. There are several indicators of this. The first is a successful track record.

The next is that the handling of investor funds is transparent. Inventory that cannot be verified does not exist.

Another sign of character is a scrupulous adherence to the securities laws. Anyone who invests in a deal where the principals are ignorant of the regulations, are making unlawful sales of unregistered securities, and who are paying illegal finders fee and commissions to unlicensed securities brokers deserves everything they inevitably get. We know that the securities laws are almost impossible to understand and comply with, but there must be a scrupulous effort. Companies who do not bother to find expert securities help are probably not good investments.

As most startups fail, lets take a look at why. Probably the largest cause of failure is management. While managers need a living wage so they do not have to worry about their own finances while building their company, managers who pay themselves lavish salaries and perks should be shot. Beware lavish spending of any kind. The watchword for a venture company is frugality. Only the cheapskates will survive the hammer and pound of the business world.

Next, although this could be called incompetent management, having a faulty business model is probably the next most serious cause of failure. Volumes can be written here, but the worst crime in this category is failing to do many customer surveys and make them thorough.

Sadly, the next cause of failure is fraudulent conduct. Some companies are formed only to provide the promoters with funds from the investors. They know the company won't work. The worst of them lie to get the money. No matter how much due diligence you do, you may be up against professional scam artists who make a career of doing this. As this is their career, they are good at it. Or you may be lulled into a feeling of confidence by the stellar reputation of the promoters. It is at this point where the investor must be a suspicious swine. As guilty as he may feel about it, it is his only hope.

The last risk is not that of failure. The risk is that of dilution. The company succeeds but the business is soaking up much more cash than expected and the new stock that is sold dilutes your equity.

As all of us in this industry know, you will spend several times more than you expect and take twice as long as you expect to do anything.

As many venture investors will tell you, the way to really do due diligence is to invest and be inside the company for a year. Then you will really know what you have.

I believe that venture companies are our real hope for the future. They will fuel growth and competitiveness. I have a soft spot for the brave entrepreneur who wants to sacrifice his life for his goals. Lets give him the resources he needs to succeed and do it fast. Then, a year or two from now, we can all look back on this as the start of a great deal for all concerned. That is what we all want, isnt it?