At a recent sharing session, I was asked how to evaluate if an angel is potentially a good investor. It’s not the first time I was asked this, and I thought I should write up something to share. But I have been procrastinating and I thought, why not let’s get ChatGPT to write the article for me? and so I did! In fact, I felt that the AI gave a really good framework and have added on some comments to the points.
What makes a good angel investor?
Original text from ChatGPT in bold below
To analyze whether someone is a good angel investor, we typically consider several key factors. However, without specific data or information about the investors you have in mind, I can provide you with a general framework to evaluate angel investors. Here are some important criteria to consider:
1. Track Record: Look at the investor’s past investments and their performance. Have they made successful investments in the past? Did their investments yield positive returns? Evaluate their ability to identify promising startups and make informed investment decisions.
This is a fair point, to look at the past records. However startup founders should take note that there have been generally less exits in Asia, hence the so called “successful investments” are far less frequent, or they will be more paper-based successes. Besides, more angel investors have only come into the scene post 2015, hence less success cases. Thus, this would not be the first point for me to look at.
2. Industry Knowledge and Expertise: Assess whether the angel investor has domain expertise or experience in the relevant industry. A deep understanding of the industry can provide valuable insights and guidance to the startups they invest in.
Thus it’s really important that you assess / reverse due diligence the investors beyond the cheque size. And how? Well, directly ask and listen to what they say and how they say things. Then ask around to others who may know the angel investor and ask for their 3rd party views. Don’t just rely on LinkedIn or their employer brand names.
3. Network and Connections: Consider the angel investor’s network and connections within the startup ecosystem. A well-connected angel investor can help facilitate introductions, provide access to resources, and offer valuable mentorship to startups.
4. Value-Added Support: Determine if the angel investor offers more than just capital. Look for evidence of their active involvement and support beyond funding, such as providing strategic advice, operational guidance, or access to additional funding sources.
It may be helpful to reach out to others who are currently / previously in their investment portfolio. Ask for their experiences dealing with this angel investor.
5. Risk Tolerance: Evaluate the investor’s risk appetite and their ability to handle the inherent risks associated with early-stage investments. A good angel investor understands the high failure rate of startups and has the financial capacity to absorb potential losses.
This is a really important point. When startup founders seek investments, they (as they should be) are always more than confident and believe that revenues are right at the doorstep, the not-so-savvy investors might just believe that wholesale (especially if the potential investors were never in business before) and think they will get their investment returns in 1-2 years.
While some of our AngelCentral members call it “play money”, I call it “money I do not need to activate in the next 3-5-7 years”. It’s hard to openly ask the investors of course; but make intelligent observations! Especially for angels who invest with cashflow (vs investing out of net-worth), or they are investing from the children’s education funds! (yes I heard of one such case prior)
6. Alignment of Interests: Consider whether the investor’s motivations align with the entrepreneurs and the startup’s long-term goals. Ensure that the investor’s expectations and vision for the company are compatible with the founders’.
I see the merit in this advice and it’s especially important for impact based investments. But let’s just be practical here. Investors invest for eventual financial returns, and they are not running the business personally. And as angels go, they do not (and seldom could) effect too much changes in the business direction, especially past the first 3-4 years. Ideally founders stay the course as promised in the early days, but as the business grows/ evolves, sometimes the vision may change. It’s hence important for founders to remember to communicate to keep the investor alignment.
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I would also like to flip this advise to the angel investors reading this. Some of our veteran angel members shared with me before that they felt “neglected” and “unappreciated” by founders who had grown and expanded their growth. They said the founders no longer update business progress, removed the angels’ voting rights, or even stop taking calls from their early investors.
Well, I said, look at the bright side, they are doing well, they will give you returns on your investments. That’s what we invest for ultimately. And practically speaking, the founders need to prioritize their time/to-do list, and usually by series B and C, they could be in multiple markets, with many more headcount to manage and so on. Besides, some later stage fund raising agreements might have precluded detailed info sharing to minority shareholders.
My personal approach to this – it’s like my boys turning teenagers or adulting. Our roles/approaches as parents (or as early investors) got to evolve! (To the founders reading this, please be reminded to at least send the annual reports to all shareholders.)
More on: How should angel investors behave?
7. Reputation and References: Research the investor’s reputation within the startup community. Seek references or testimonials from other entrepreneurs who have received funding from the same investor. Feedback from previous portfolio companies can provide insights into their investing style and supportiveness.
Totally! Remember that these factors are not exhaustive, and the evaluation of an angel investor ultimately depends on your specific context and goals. It’s essential to conduct thorough due diligence, meet potential investors in person, and have open discussions to assess compatibility and alignment before making any decisions.
SN Concludes: I am not the first one, but I definitely appreciate the AI helping to get this article out in under 20 min! (first draft out in 2min, I needed another 18min to add my points) For angels looking to invest in AI related startups, before you commit, check out the AngelCentral Deep Dive on AI investments.