I am often asked by friends and colleagues – “Tell me about
Angel investing – how does it work, what are the risks, and how do you pick the
next Facebook????”. As we embark on the 4th Seattle Angel Conference
in September, I thought I would share my answers more broadly here.
A little over a year ago, I got involved in Angel investing
after running a startup focused on data security called Newline Software. I
wanted to better understand what investors look for, so I jumped in with both
feet, joined Alliance of Angels as well as the Seattle Angel Conference. I took
7 months off between jobs and spent my time driving around Seattle listening to
pitches, attending demo days, taking part in due diligence, and meeting with
entrepreneurs and other investors. I drank a lot of coffee and learned a ton.
At this point, I have now heard somewhere north of 150 startup pitches. There
are a lot of very interesting ideas out there.
What have I learned? A lot. Trained as a technologist, after
being an engineering leader for 20 years at Microsoft, I tended to think more
about the technology, and not about the value proposition for the customer and
the problems being solved for the customer. As my friend and former Microsoft
colleague @CharlieKindel likes to say, I had some things to unlearn from my
great experiences at Microsoft.
Writing a check is something everyone knows how to do, but
the hard part of making an investment is to determine if the startup you are
looking at, has a good opportunity to succeed. Unfortunately many do not make
it, and as I explain to potential investors, you should be investing a small %
of your portfolio into startups and you should do your homework. When I think
about my first angel investment, at which time I did not know what I do now,
the business plan and pitch I reviewed as great in and of itself - but I failed
to compare it to anything else in the industry, and I didn’t talk to any other
investors. I was uneducated as an Angel investor, but I did know how to write a
check.
There are many different ways to look at startups and
through my experience interacting with lots of investors, listenting to pitches
and talking to entrepreneurs, I have developed my own priority list. Talk to
other investors, and they may view things differently. Part of what we do at
Seattle Angel Conference is to teach you to come up with your own approach to
investing. What I look for, in order of importance, is:
-
Team - Great ideas don’t execute on their
own. You need a team, preferably with some startup experience, that knows how
to execute on a good idea, preferably understands and follows the Lean Startup
model, and knows when to pivot. The sooner a startup realizes its idea(s) are
not right and can pivot, the less amount of money is burned.
-
Market Opportunity – It needs to be a big
enough market, and enough product differentiation that the product can achieve
success. Who is the competition? How will the startup differentiate? If the
startup is creating the next great search engine, I would decline as that is a
pretty saturated market with entrenched competition. If they have figured out a
way to do searches by scanning your brain waves, that might be more
interesting.
-
Value Proposition – A great question to
ask of a startup, is what is the customer value prop? Great technology
solutions don’t always translate into customer value. If someone can clearly
articulate the value proposition of their product, it usually means they
understand the customer needs, the problems they are solving, and how to bring
value to the customer. Think about yourself as a customer of many things – the
last time you bought a vehicle was it because it met the needs you had or did
you buy it based on an innovation in the engine and the exhaust pipe?
-
Sales Strategy – If it’s an addressable
market and has a value prop, how are they going to sell it? Ideally they have
someone with sales experience on staff. Sales is a lot about connections,
building relationships, being able to close a deal. Lacking sales staff doesn’t
mean they can’t be successful, however cold calling is hard. Engineers are
great at engineering, but not always at sales. If someone tells you the
solution is direct sales to small business that is a red flag. That is a sales
strategy that is very hard to scale.
-
Product – I tend to invest in products
that I understand, because it’s easier for me to understand if someone would
buy it, easier to determine if it’s a good user experience, etc. I have seen
what I think are great products, but in industries that I don’t know. In cases
where I know people in those industries, I have reached out and asked them what
they thought. I have learned a lot this way.
Lastly, do you homework. Ask other investors. The great thing
about being a part of Angel groups, is the opportunity to network with other
investors. Through the Seattle Angel Conference and Alliance of Angels I have had the chance to expand
my investor colleague network. The opportunity to ask them what they think
about a particular deal, what they know about a particular company, and what
sorts of investments they are making.
