What Makes for An Attractive Angel Investment?
Just about every time Sand Hill Angels hosts our practice pitch nights, which we call Sand Hill Angels RAW, startup founders ask our members what we look for when we assess an angel investment. It turns out that each of our members has different criteria; there is no one, simple answer. So we asked a handful of our experienced members what they look for in an attractive investment, and summarize and share here some thoughts and quotes.
One theme that comes up frequently is about the startup idea itself. Manthi Nguyen, a Sand Hill Angels member for almost 9 years and with a background in high-tech manufacturing, says “I look for an ‘uncommon’ insight that an entrepreneur has that is not obvious. This insight can be about the market, re-mix of existing technologies or new technology, business process reinvention, etc.”
Rick Lazansky is a silicon industry veteran and past president of Sand Hill Angels. He, too, focuses on the big idea, looking for a “big opportunity in a huge market, where the timing seems right. That might require speculating about a few years in the future for a frontier technology investment where the R&D will take some time, with above average risk. Gretsky used to make the point that you want to ‘skate to where the puck will be, not where it is’. Entrepreneurs seem to forget this.” Rick goes on to say: “Is my first reaction ‘But that’s stark raving madness?’ The great companies sometimes turn out to be the ones that took an idea to its limits, such as Uber. We invested in Flywheel early. Ever hear of it? Well it’s kind of Uber for existing cab drivers. Yeah, close, but no cigar, right? Or take AirBNB which sounded to me like ‘invite a serial murder to spend the night in YOUR house.’ Almost as good as ‘that’s madness’ is ‘Huh? I don’t get that at all.’ It’s a low bar, yeah, but it gives me leeway to invest in almost anything.”
Ralph Eschenbach, a retired Silicon Valley engineer and member of Sand Hills Angels since 2004, builds succinctly on the need for founders to start with a good idea by applying four basic questions: “1) Are they solving a real problem? 2) Is the solution defensible? 3) Is the team capable of executing the plan? 4) Only then, is the deal reasonable?”
Amos Ben-Meir is a Sand Hill Angels board member, an engineer, and has over 200 startup investments. He says he looks for: “Having a narrative/story for the company and the problem it is trying to address. Also, evidence of product market fit, or if it is a new market, a vision to see how that market might unfold.”
Steve Bennet, a lecturer on entrepreneurship and frequent startup investor, has a checklist for assessing startup ideas that includes: deep understanding of market and competition, big (enough) opportunity, compelling solution to a real problem, potential for competitive advantage, and fundable by downstream investors, perhaps on a dual path.”
Gordon Mitchard, a board member and long-time founder/investor, says that “timing has to be ‘just right’. I like to see early progress funded by friends/family to get far enough along to have some feedback from potential customers, but not so far along that the valuation outstrips our ability to have a meaningful position.” He also looks at the capital intensity of the idea, looking for “limited projected total capital requirements. This usually precludes ‘swing for the fence’ unicorn expectations. The more capital, funding rounds, and time that are required usually increases both the risk that something will go wrong, and the size/probability of the exit that’s required for early investors low in the pref stack to make money.”
Back to Rick Lazansky, who adds a slightly different twist to his view of an attractive startup idea, looking for “something in which I can take solace if I do lose money. For me, and perhaps I’m alone in this, that can be investing in something that might have saved the world if it worked, like a new cure for cancer. Then again, and experience counts, it can be something that is eventually nothing more than a funny story at a cocktail party. Apparently I don’t have many of those, or at least I don’t get invited to too many cocktail parties.”
One test of an idea is market traction. Does the startup have early revenues, or at least enthusiastic customers? Steve Bennet likes to see traction as well as significant accomplishments. Steve Lamont, a technology marketing veteran and Sand Hill Angels board member, points out that revenue traction helps overcome at least four concerns many angels have about a particular investment opportunity. 1. The customers want or need the product. 2. The company knows how to tell their story, and has working messaging. 3. The product works. And 4. The founders have a commercial mindset, rather than polishing their product forever. “If a team has significant traction they would be wise to mention it up front in their pitch.”
Markus Fromherz, a lifelong innovator with more than 40 patents and a past Sand Hill Angels president, has a view of traction that “compared to a later-stage investor, I’m less looking at traction, which of course often doesn’t exist yet. Instead, I'm willing to believe in stories about problems and solutions, and I particularly pay attention to the differentiation. In that, it’s also important to me that the explanations are concrete. Either the solution already exists in some form (i.e., has been implemented), or the story of how it gets built is convincing. I don’t react well to the beautiful stories of the future that don’t include how we get there.”
We will share other perspectives in future blog posts.