Angel Investing: How to Choose the Right Opportunity
With any investment decision you make, you need to grapple with how to select the right opportunity. You may make some decisions based simply on muscle memory or past experience, but investment in a new area calls for a thoughtful approach to choosing the right investment deals and stages.
Personal Choices
When starting out, you should keep investments broad-based, selecting the best ideas and founders across sectors while choosing a few deals in your area of expertise. For instance, you may have spent a decade in the advertising industry, but that doesn’t guarantee success when choosing the right advertising deal in which to invest. It may only give you a slight advantage. Similarly, simply reading about hot deals in a sector or hearing about them from another angel investor builds FOMO (fear of missing out), which isn’t a good investment strategy.
Stages
As an angel investor, you should also define the deal stages in which you want to participate. As a general rule, early stage deals have maximum risk and great returns. Usually, angel investors participate in pre-seed, seed, and series A stages, although some tend to invest in late or growth stages for a more stable 2X-5X outcome. My personal choice is 40% pre-seed, 30% seed, 20% series A, and 10% post series A.
Framework
Broadly speaking, you want to develop a basic investment thesis to quickly review an opportunity and decide whether to accept or decline it. Here, I’ll share a simple framework I follow. We’ll revisit this framework in detail again in a few months after analyzing some deals. Think of a framework as an outline and not something that sets boundaries on everything you do. Be flexible as you learn, and edit and update it as you go along.
Framework and Questions
Team/Founders
Do they have domain experience?
Why are they doing it?
Any personal story or discovery?
Technical/Generalist - Single or more than one?
Repeat founders?
Pedigree?
Market/Idea
Total addressable market?
Can this become a $100mm ARR (annual recurring revenue) in five years?
Does the market have a trend behind the idea/AI currently?
Competitive landscape – Intensity of Competition?
Product/MVP
Patent?
Unique insight?
Is 10X better than what is present in the market?
Can you evaluate the product?
If a product launched, how sticky were the early customers?
Any feedback?
Can you interview customers?
Distribution
Partnerships
Channels
Marketing return
Sales teams/SDRs/BDRs
Dependent or PLG?
Traction
Initial traction
What channels have been tested?
Pilots, LOIs? Paid Customers?
Signals
Hockey stick growth in any metrics?
Are they able to attract a well-known advisor?
Any big brand as a partner?
A VC as a backer?
As an angel, if you’re reviewing a early stage deal, some of the above questions may not be relevant, so you may put more weight on team or idea/market areas.
In regard to analyzing team vs. market/trend, Andy Rachleff, co-founder and executive chairman of Wealthfront, says, “When a great team meets a lousy market, the market wins. When a lousy team meets a great market, the market wins. When a great team meets a great market, something special happens.”
Founders have an intense need to pick a good market; after all, they’re dedicating five to ten years of their lives to their startups. While VCs are diversified, founders have one shot! You’ll hear some success stories around a niche idea that grows outward into a huge new market, and another option is to choose a large multi-billion-dollar market to build vertically integrated solutions.
The above framework is enough to begin with if you’re not the first check because in addition to the above questions, you’ll have to do more vetting. Ideally, you want someone more seasoned who has done broad-sweep due diligence. You can go through a more detailed due-diligence checklist and do an in-depth analysis if you have time, but the current framework is for cases where a syndicate lead or more experienced angel investor is sharing a deal with you.
This time around, we didn’t go through in-depth analysis with the framework. You could create a 100-point checklist, but that’s not the intention here. In the majority of pitches, GPs/seasoned VCs evaluate deals based on a few mental models and broad questions. Your intention as an angel investor should be to do the same as you are exposed to more deal flows—leaving the in-depth analysis to syndicate leads or VCs that are participating in the deals. However, if you don’t have a known VC/syndicate in a deal that you’re evaluating, that will call for more in-depth due diligence. As a angel, though, at the end of the day you basically invest in the founder and market/idea.