Become an Angel Investor: An HBS Framework

It’s true that the global economic downturn has clipped many an angel’s wings. Recalling our previous post, Interesting Finding on Angel Investments in 2009, total angel investments in the first half of 2009 stood at US$9.1 billion, representing a decline of 27% over the first half of 2008.

The gloomy economic environment and depressing exit opportunities had left many an angel no choice but to keep pumping money into existing portfolio companies to ensure survival. As a result, 58% of investments were made in the post-seed stage, compare to only 27% of investments made in the seed stage, a 19% drop over the same period in 2008.

While this seems worrisome, “when compared to the market correction that occurred in the second half of 2008, these data indicate that the angel market appears to have reached its nadir in the first half of 2009,” said Jeffrey Sohl, director of the UNH Center for Venture Research at the Whittemore School of Business and Economics.

Opportunity Favors the Prepared Mind

If one of your New Year’s resolutions includes becoming an angel investor this year (why not??), you may want to begin by studying the classic framework offered by the Harvard Business School and many others in the field; all of which agree that opportunities should be assessed on the basis of 4 elements — people, context, business opportunity, and deal.

• People: Judge the cohesion of the team and look at all other people involved, including other investors or advisors.
• Business opportunity: Evaluate the business model, market size, customers, and distribution channel.
• Context: Study macro factors, such as customer trends, government policies, technology development, and state of the economy.
• Deal: Look at the structure, terms, and pricing. Do you think these are fair? Are you happy with them?

Of course, you won’t bother much with deal structure if you’re just listening to a pitch or looking at a plan or demo. As James Robinson IV of RRE Ventures said, “No one I know bothers with terms, patent analysis, detailed projections, or any of that when looking through a plan. That comes later.”

You’re smart enough to know that the framework itself won’t turn you into Ron Conway overnight. But it’s a start. And there’s no better time than right now to start when the desire to improve and do something new is strong.

Here, we wish you all a crazy profitable 2010!