New angels often make crucial decisions based on intuition alone. They follow hunches or invest in a startup company because they have a “gut feeling” it’ll be the next Google. Unfortunately, mere intuition is often a poor guide in making investment decisions, especially decisions about investing in startups.
This is not to say you shouldn’t trust your instincts. They do come in handy. For example, if you don’t like or trust the entrepreneur, it’s probably best to just pass on the opportunity. You’ll be working and interacting with him for a good few years. Why waste your time and energy doubting the startup’s ability and/or integrity if you don’t even have faith in the founder?
What I’m saying is, it may be tempting to make decisions based on intuition alone because you find it difficult to gather the facts you need. But the more information you have about a company, the more likely you’ll be to succeed.
What kinds of information? For starters, information about the principles involved. What experience do they have in the field? What experience do they have running a business? You should also look at the business itself. How big is the potential market for its goods or services? Who are its competitors? What sets it apart from the competition?
Then there are the financial facts to consider, information about audited accounts, management accounts, and financial projections. Depending on the industry, you may also want to look into legal questions and issues involving intellectual property.
Digging up all this information can be a daunting challenge. The good news is that you don’t have to do the digging alone. Venture Hype is a learning exchange for angel investors who want to use both their hearts and their heads to guide their investment decisions. The network delivers news and information in digestible format and teams up with seasoned industry players to help take the grunt work out of investing. This doesn’t take the passion out of angel investing. It simply channels it in a more promising direction.
The next article in this series takes up another tough issue: how to set ideal valuations and establish favorable terms and conditions.
* For series, references are published in the last installment of the series.
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