As a successful businessperson, you want to give back to your community and help the next generation of entrepreneurs grow. Choosing the right startup to back can require a critical eye. The things that you knew about your business, you need to assume about the startups, especially if they don’t divulge all the details behind their idea.
Even though you may not be privy to all the information about an idea, you should keep an eye out for the critical element that makes the business a “good bet.” Below, 10 members of Forbes Finance Council share their best advice for angel investors. Here’s what they say you should look at to determine whether a company is likely to be a successful startup or just a flash in the pan.
1. Join A Local Angel Group
Belonging to an angel group not only gives me access to a larger range of diverse investment opportunities, but it allows me to review potential investments alongside dozens of high-caliber, successful investors. Joining an angel group provides the ability to invest in a group or LLC at a much lower rate of participation, with the added benefit of a committee vetting each opportunity. – Anthony Holder, C&H Financial Services, Inc.
2. Make Sure You Understand The Risks
Angel investing holds a substantial risk that needs to be clearly understood before investing in any angel/seed round. The highest-ranking component to discern when listening to founders pitch their firm is the ability of the owner to articulate their company vision relative to how they want to implement their plan in the short-term, given their lack of people and resources. – David Miller, PeachCap Inc.
3. Look For Strong Business Systems
Successful entrepreneurs know that to succeed, you need to develop strong business systems. As an angel, you usually get a first look inside a business, and the systems need to be there for the business to grow. Besides joining an angel group, this is the next most important aspect to keep in mind. – Vlad Rusz, Vlad Corp. USA
4. Only Invest In Exceptional Entrepreneurs
Entrepreneurs drive success or failure — it’s as simple as that. So, when looking for potential investments, think about what the entrepreneur can do with their business, not what you could do with it. Never invest in a mediocre entrepreneur assuming you can run their business for them; it’s a disaster waiting to happen. – Bill Baumel, Ohio Innovation Fund
5. Invest In Missionaries, Not Mercenaries
As angel investing is mostly limited to early-stage startups, angels must realize that the initial proposed business idea will often have to be revised. This process is commonly referred to as a “pivot.” Startup founders, passionate about bringing a solution to market, are more likely to effect a necessary change — they are “missionaries” in search of a working product. – Christian Kameir, Sustany Capital
6. Consider Their Plan Of Action
Passion and know-how are important for a startup, but the key thing to watch for in a startup company is a clear business plan. A startup needs to have a clear idea of where they are going, what they are planning and an in-depth look at their market. A good plan should focus on competitive analysis, potential issues and the bottom dollar. – Greg Herlean, Horizon Trust
7. Learn What’s Required Besides Money
Before investing in a startup or any newer company, work with the startup to understand what level of involvement will be required with the company. As an angel investor, you now hold a stake in the company and may participate in decision-making scenarios. Be very clear upfront how much or little involvement you would like to have when you invest money into the company. – Jared Weitz, United Capital Source Inc.
8. Really Know What They Do
Angel investors should be investing in what they know. Considering the high level of inherent risk in any startup, investing in something you don’t know doubles that risk. If you know what they do, you can provide valuable advice and have better insight as the company grows and asks for more money. If they just want your money, you should be worried. – Chris Tierney, Moore Colson CPAs and Advisors
9. Choose An Industry Based On Prior Successes
Here are two things I would tell successful entrepreneurs when considering investing in a startup. First, entrepreneurs who wish to become angel investors should invest in industries where they have previously cultivated success. Second, most startups fail for a myriad of reasons. Consider whether or not the potential return is enough of a reason for you to be investing. – Shai Stern, CheckAlt
10. Invest In Companies Through Economic Cycles
Investors should research investments carefully and look for well-run companies in exceptional fields of growth. Even in periods of “sub-par economic growth,” there will be innovative companies that are creating or profiting from major paradigm changes. Aim to invest in these companies through economic cycles and sell when business conditions change, rather than the market. – Gerry Frigon, Taylor Frigon Capital Management LLC