Home Back Issues March 2007 What does an angel investor want?

What does an angel investor want?

| Print |  Email
Archives - March 2007
Thursday, March 01, 2007

entrepreneur0307.jpg

The list starts with drive, discipline

Angel investors in the United States provide about 90% of all seed and early-stage private equity capital for startup entrepreneurs. In effect, they are backing the jockey rather than the horse, so they need to be confident an entrepreneur/CEO can successfully bring a product to market and sell it.

The importance of investors thoroughly investigating the entrepreneur and key early hires was a recurring theme at a recent seminar on angel investing in Portland presented by the Ewing Marion Kauffman Foundation, the Oregon Entrepreneurs Network and the Women’s Investment Network.

Sue Preston, an entrepreneur-in-residence at the foundation, says that ideally investors are looking for entrepreneurs who are “kind of schizophrenic — they need to be passionate, outrageously enthusiastic about their venture but also, and this is crucial, coachable.”

What an investor wants, she says, is a driven and decisive leader who is more interested in the success of the company than in being in control. Someone willing to share equity and even hand over the reins to others, if necessary. She acknowledges this can sometimes take tough negotiation.

Entrepreneurs are always optimistic when estimating revenues, but Preston says they should be able to articulate a clear and structured path to profitability, have a realistic assessment of their potential market and a deep understanding of their competition. “It’s a big red flag for investors when someone says they have no competition,” says Preston.

Once the investor feels she can work with the management team and the business plan looks good, it’s then time for due diligence — what Preston calls “the meat of investing.” That’s when the investor needs to go over key issues — the market, the business plan, the money, the numbers, and of course, the management — with a fine-tooth comb.

Angel and entrepreneur Kathy Long Holland of LongSherpa Design in Lake Oswego points out some risks of ending up with the wrong CEO. “There’s both market risk and organizational risk. Often the CEO brings in key members from his/her network to be on the team and, worst-case scenario, investors may find themselves having to do a complete team change-out. The company will be in a start-over phase when it should be playing full court press.”

With the rise of angel investment groups, procedures for assessing the management team have become more standardized; gut sense is no longer the only guide. Due diligence checklists now often call for resume review, reference checks and third-party background checks.

In general, says Preston, the entrepreneur should be forthright, and investors should be able to talk to customers and be welcomed at site visits. Also, “The entrepreneur should have some skin in the game. You want them to be as committed as you are,” says Portland angel Spencer Brown. Some investors say they will invest only if this is the case.

Another investor, Sydney Joyner, of the Joyner Group of Portland, says that integrity, toughness and the ability to listen are all important. Are they comfortable with risk? Do they have high endurance? Also, pay attention to how the founding team treats money. “How creative and frugal are they? Are they cavalier about investment money?”

Long Holland likes to be involved in putting the team together from the start and recommends close questioning on a company’s sales process. For example, she has salespeople take a personality profile test to see if they really can sell.

Long Holland says investors should at this stage be thinking, “What’s the end game here?” She adds, “It’s a good idea to design an exit strategy from the beginning.” These days, that exit is far more likely to be by merger or acquisition than by IPO. But whatever the route, it’s essential the management team be open to it.

Serial entrepreneur Mark Owen of Phoseon in Hillsboro cautions that some entrepreneurs will turn down money rather than submit to overzealous and time-consuming due-diligence investigations that they think will hinder them from running their businesses.

But, he adds, angel investors are also in a unique position to add value to a startup by contributing industry knowledge and a network of contacts. He says one of his angels took him to a trade show and “gave me personal introductions to every vendor on the floor.” 

Successful entrepreneurs, says Owen, always will look for the smart money — rather than just money.

— Rebecca Koffman


Have an opinion? E-mail This e-mail address is being protected from spambots. You need JavaScript enabled to view it

 

More Articles

What I'm Reading

October 2014
Thursday, September 25, 2014

Nick Herinckx, CEO of Obility, and Jake Weatherly, CEO of SheerID, share what they've been reading.


Read more...

100 Best Nonprofits to Work for in Oregon [VIDEO]

News
Thursday, October 02, 2014

Screen shot 2014-10-02 at 11.17.21 AMMore than 5,500 employees from 180 organizations throughout the state participated in the 100 Best Nonprofits to Work for in Oregon project.


Read more...

OB Poll: Wineries and groceries

News
Friday, October 24, 2014

24-winethumbA majority of respondents agreed: Local vineyards should remain Oregon-owned and quality is the most important factor when determining where to eat or buy groceries.


Read more...

Podcast: Turn Things Around with David Marquet

Contributed Blogs
Friday, October 17, 2014
davidmarquet thumbBY TOM COX | OB BLOGGER

How can you move from a command-and-control leadership model to one of true empowerment and accountability? David Marquet did, and he took notes along the way.


Read more...

Podcast: Interview with Pete Friedes

Contributed Blogs
Wednesday, August 27, 2014

082714-thumb friedesbookTom Cox interviews Pete Friedes, author of "The 2R Manager," about becoming a Best Boss.


Read more...

Downtime

October 2014
Thursday, September 25, 2014
BY JESSICA RIDGWAY

I'm not very interesting,” says a modest Ray Di Carlo, CEO and executive producer of Bent Image Labs, an animation and visual effects studio.


Read more...

Gone Fishing

October 2014
Thursday, September 25, 2014
BY LORI TOBIAS

Business has been good to Laura Anderson, leading some to suggest she must be awfully lucky to find such success in a business notorious for failure. But luck’s had little to do with it.


Read more...
Oregon Business magazinetitle-sponsored-links-02
SPONSORED LINKS