Evaluating A Potential Angel Investment: First Look At The Jockey, Then The Horse
If you are a novice angel investor, you may be wondering how you should go about evaluating your potential investments. While you may be excited to kick off your portfolio, you will also be cautious about not jumping in at the first opportunity you get. Ultimately you are putting up your own personal capital and want to ensure that you (and the company you are investing in) have the highest possibility of success.
At EMAN, we have come up with a framework which we recommend to all our angel investors. Our investment strategy encompasses 5 key characteristics: Team, Market, Product Market Fit and if the startup is Transformational and Defensible. This article explores the importance of the Team.
Howard Tullman, a serial entrepreneur, venture capitalist and educator, went as far as to say that when it comes to evaluating startups, “it’s the jockey, not the horse” that truly matters. We consider that the right team is the most important criteria when evaluating a startup, although we would not go as far as to say that it is the only thing that matters. For that reason, our approach can be rephrased as a ‘first look at the jockey, then the horse’.
When evaluating the team behind a startup, any angel investor should look for a number of key characteristics. Firstly, evaluate the team’s expertise, execution and grit — you should look for founders who have clearly demonstrated these qualities. Being a founder is hard work and they need to be able to tough it out and come up with creative solutions when things get hard. Domain experience is useful but more than anything look for founders who are smart, adaptable and demonstrate real perseverance.
As Covid-19 hit, we have seen two types of founders — founders who had decided to wait out the pandemic and founders who have identified new opportunities and pivoted to ensure that their businesses are thriving despite the adversity. As an investor, you want to back the second group of founders — the teams that are unafraid to make bold business moves when needed and adapt to the circumstances they operate in rather than wait for the circumstances to change.
When evaluating a potential investment, ask yourself ‘Do I believe this team has what it takes to make this business work?’. Someone may come up with a great idea but if they lack the skills or the know-how to make it work, the business, and your investment, are unlikely to succeed. Also, as an angel investor, look for founders who are truly passionate about their business — real passion for their business will keep them going when things get tough. You want to back founders who want to be successful to make a difference, rather than simply make money.
Angel investors, unlike investors in public equities, tend to establish a relationship with the founders and do so prior to the investment. As you are evaluating the potential investment, you should have a number of calls or meetings with the founders to understand the business and also get to know the team. This will help you make up your mind whether you think they have what it takes to make the business a success. This will also give the founders an opportunity to get to know you and understand what you, as an angel investor, bring to the table. Frequently angel investors’ involvement will go beyond simply putting up capital, whether through mentorship or a more day-to-day involvement, and therefore you must make sure that you invest in founders you want to work with long term.
