Each Angel investor develops their own criteria for how they evaluate a startup for investment…or even whether they will even spend any time referring the firm to others…or advising the firm. The Angel’s criteria develops over time as investments pay off, or not. It is a framework for making decisions. For some Angels, it is a written and detailed checklist. For others, it is a general framework or for some, based on feelings.
Receiving many, many proposals and attending pitch days, as well as speaking at angel events, means I must have criteria for evaluating firms, or otherwise, being overwhelmed. I think in three’s and like to put every decision process into three categories..only three so I can remember and express the items. After seven years of angel investing, my current three point are:
Let me explain as the titles may not be obvious…or you may presume what is meant by a category. This criteria has definitely evolved for me. Nothing is obvious about startups and investors. Nothing is quantitative about angel investing. There are many emotions and motivations impacting decisions.
Guiding every decision is the recognition that most startups fail. Therefore, I approach my angel investments, as I write the checks, as “like-charitable donations” that may have a financial pay off. However, just like I approach charitable donations by giving to stable nonprofits, the application of criteria helps me sort through the many requests from startup firms. My current thinking:
- Quality of the founders – been in the industry, drive to success (even if they have failed at an endeavor), open to input, etc.
- Personal situation – ability to commit 100%+ to this endeavor
- The team – building a team with individuals of varying skill sets, not just with like skill sets
- Advisors – attracting names with the right skills and connections to whom they actually consult and work with on initiatives…not just names
- Relationships – overall, creating an open environment of respect for individuals as employees, customers, suppliers and investors
- There is an actual product or service, which is beyond the proof of concept
- The monetization of the product or service is clear
- There is traction of sales, or at the very least, signed and binding contracts
- All aspects of the costs to produce, market, sell, deliver and service the product or service are understood, as well as cash flow
and my newly added criteria – Pain:
- The product/service answers a pain point of the customer, not just a “nice to have”
- The existence of this pain point is clearly demonstrated by the customer by actually paying for the product/service
- There is evidence that there are many more customers who are willing to pay for the product/service to address their own pain point
There is a recent HBR (Harvard Business Review) article – Know Your Customers “Jobs to be Done” – which expresses my points about the customers’ pain quite eloquently. The article is about innovation and how all of the quantitative big data information is just not enough to ensure the success of a new product or service. The true indicator of a new product or service success is “to home in on is the progress that the customer is trying to make in a given circumstance—what the customer hopes to accomplish. This is what we’ve come to call the job to be done.” Or what I refer to as solving a pain point of customers.
People, Product, Pain – these are my criteria. A firm may disagree with my criteria but this is it…for me, right now. There are many other Angels and advisors, each with their own criteria. The trick is to match up with the right people for your startup.
Image credit: CC by James Lumb