The choices you make when raising seed capital from an angel investor will have considerable positive or negative impact on the long-term success of your company.
So obviously it’s important to find investors who will add value over and above the dollars they invest in your company. So take extreme care in their selection.
Pick your partners well and do real due diligence on your angel!
Ask these FIVE KEY Questions, and examine the answers closely!
1. What value and connections will you bring to the mix?
Does the angel have expertise directly related to your start up focus? Have they cashed out successfully from a company in a similar space and/or with a similar business model to yours? Even experience indirectly related to your space can be valuable, especially when the angel has connections through their network, which will be valuable to increase your customer or client base. Check out their network; make sure it is real and not just a façade.
Partner with angels who are passionate about what you do, and show they plan to invest more than money in your success. A true-shared passion can lead to good advice and intros even during your first meeting.
2. How much time will you dedicate to my start up?
How many other angel investments does your investor have, and where are they? How many hours a week will they be available for direct or phone consultation. What other expectations for involvement do they have; such as progress (milestone) reviews, and introductions to customers, clients, vendors and other investors.
You want and need quality time with your Angel; they need to be as dedicated as you in order to advance the goals for the success of your company.
3. How much money will you bring, now and later?
This will be based on a mutually agreed valuation between the Founder and the Angel. (the short answer).
Often, the initial investment does not stretch as far as everyone thinks/hopes it will, so find out up-front how willing your Angel will be to add to his initial investment, and how willing and able he is to make the appropriate introductions to VCs when the right time comes. Also discuss what the incremental cost to you will be!
Delay in getting that first cheque is often an indication of future difficulties. Paul Graham, Y Combinator’s founder, will often advise startups to go with whoever will write a cheque with the least hassle, however this may determine a less than optimum selection of an Angel investor/partner for you, all other needs considered.
4. How much control do you want?
You will find there is a fine line between help and control, and often an area of great misunderstanding. This is something that needs to be addressed very clearly in your term sheet.
Be careful when your Angel wants control by taking a board seat (when that’s inappropriate), and doesn’t demand 50% of the company for an angel investment. You should be structuring things so that all the angels in aggregate should take 5-20% (ideal world). Don’t give away the ship for one check.
5. What is your track record as an Angel investor?
Have previous investments failed? Discover why? Check references with past companies, which your angel has invested in; check both failures and successes. Find out from past investments, if they kept money in reserve and were forthcoming to add to their investment when needed. Was their attitude supportive or negative? Try to speak directly with other entrepreneurs they have invested in.
Just as the Angel does due diligence to invest in you and your company, so should you take the time and effort to do due diligence on your Angel; make sure that you are both clear about and understand each other’s intentions and expectations. A good Angel will be supportive of your investigation, just as you will be supportive of their investigation.