If you've some spare riches to invest and an interest in start-ups then you might be tempted to get involved in angel investing. But if you don't know what you're doing it can be easy to get burned. Here are some pointers from tech investor Steve Garnett.
1. What should the motivation of an angel investor be?
All angel investors want to make a sizeable return on their investment. Investing in early stage companies is a risky business because many companies fail to make the transition from a start-up to a mature, profitable business. For the angel investor, the motivation should be more than making money. It’s also a great way to provide advice, experience and to use their network to support the entrepreneurs who founded the company.
2. How much or little can you invest to make a difference?
There is no real minimum, particularly if you join a fund-raising round of other angel investors. Most start-up entrepreneurs want many investors who can help and guide the business and, especially, make introductions to potential customers. This "smart money" is what great entrepreneurs look for.
An angel who just invests money and walks away hoping for the best, is not what a startup business needs. Regarding maximum investment, I believe in not putting too much money into the business too soon. The start-up should run on ‘fumes’: it’s very easy to waste money if too much is injected too soon. The business needs to fine-tune what makes customer success and how to efficiently go-to-market with their products or services before turning on the money taps.
If too much money is put in too early, at inevitably low valuations, the founders can be diluted to an extent that they can become paid employees (as their percentage holding of the company becomes too small). This creates motivation problem: entrepreneurs work incredibly hard and make huge sacrifices to achieve their dreams. Maintaining a good company share is essential for them to be motivated.
Read more: How to get started as a business angel
3.How risky is it?
Very! There is no guaranteed instant ROI and it’s a mistake to think that you can withdraw your investment in the short-term. An angel investor needs to be patient and realise that liquidity will be tied up for a while. However, investing is really fun and it can be hugely rewarding to see a company start with just an idea and turn it into a successful business that inspires people and customers love.
4. What do you look for before investing?
I have several rules that I apply:
- Being in the right place at the right time is key.?Is the market for the product or service ripe? Is it disruptive and one that should grow quickly in time? A ‘me too’ market that's been and gone, or one that doesn't excite you, is no good.
- People. This is key. The company founders need to be smart, hard-working, passionate and engaging. With these attributes they can adjust to whatever bumps in the road come along - and there will be many. Sometimes great people fail to hire other great people who then can't scale the business. A company with a small number of people and some who are "just OK" is worrying.
- A compelling vision and a plan to back it up. A company needs to have vision that is hugely inspiring & compelling and can be backed up. When I met Larry Ellison he talked about beating IBM with 300,000 employees vs Oracle’ 100 but his vision was compelling and ultimately achieved. I discussed Salesforce.com’s vision with Marc Benioff around the ‘end of Software’ – and that is now called cloud computing.
- Customer Success. ?Business travels at the speed of customer success. If the early customers are being successful they do three things: buy more, recommend the company to others and if they change circumstances they buy again. You know you have a real success when people don’t just buy, but renew like the SaaS model. If customers are coming on board and then leave, there is something very wrong.
5. Should you just invest in what you know?
I do. I’m a software guy and that's what I know and I don't swim too far from the shore. It’s a common mistake to invest in a hype product with no real customer, or investing in a plethora of things and you become a jack of all trade but master of none.
6. What else should angel investors walk away from?
It’s common to find entrepreneurs who want to flip their companies and just focus on an exit and selling fast. Be aware of this approach as great companies are bough not sold: building value in a company is hard work and there are no short cuts.
Investing in friends is another area of caution. You have to apply the same rigour as with an opportunity coming from outside. After all, investing is a business, is not about being head of a popularity poll!
Tech investor Steve Garnett is EMEA chairman (emeritus) of Salesforce.com and was chairman of HR software provide Fairsail until its sale to Sage earlier this year for a reported £110m.