How do you tell if an angel investor is the right fit for your startup?

How do you tell if an angel investor is the right fit for your startup?

Introduction

Listed in this article are the top questions that a startup CEO should ask of an angel investor to determine if they, you and your project are a potential fit.

This article is brought to you by StartupStorey and if you like this article, check out other articles on entrepreneurship.

Also included are the answers from CEOs who have kindly responded to our request for their input:

 

So, how do you tell if an angel investor is the right fit for your startup?

This question suggests you have options.  I.e., there are more angels lined up to invest in you than you can fit in.

Then — congratulations!!  It’s not that common at such an early stage.

So you get to pick, early.

StartupStorey - Finding the Right Angel Investor

The key when you get to pick your investors, at different times and stages, is to pick who can help you the most at that stage.

In the early days, here’s what you probably need:

  • Help scaling from nothing to something.  An investor who’s actually done what you’ve done for real can help you here 10,000,000x more than someone that hasn’t.
  • Help getting at least 1 great hire.  Can the investor help?  Hiring is always impossible.
  • Help with the next round.  This should not be underestimated.  Is the investor someone VCs like to follow?  For real?  And will he or she be able to help here?
  • Help with PR and promotion.  Most investors can’t do this.  But some can.  This can help.
  • Help making you seem Hot (or at least, Cool) before you deserve it.  Few can do this.  But it’s super valuable.
  • Help being a true mentor.  Related to the first point.  Very few can really do this.  But if you can get someone to really help you be a better CEO — this is worth its weight in gold.

 

Doing due diligence is as important for the entrepreneurs as it is for the investors.

It pays off to check the backgrounds of the investors for potential culture or chemistry clashes, as well as to find out if the investors really support the entrepreneurs in their portfolio.

  1. Could you refer me to entrepreneurs who you’ve worked with who highly recommend you?

With this question, you can check how the investors get involved with the companies they invest in from the source. This will also give you the “success” perspective of the investor.

 

  1. How many Founders/CEOs have been fired by the board from your portfolio companies? Can I talk to them?

With this question, you can check if they stick with the entrepreneurs they choose to invest in. From entrepreneurs’s perspective, this is crucial information to know.

 

  1. How much return have the entrepreneurs seen from exits in your portfolio?

This will show you how much equity the founders have kept and if they did well too in the exits. Truly great investors care about entrepreneurs in this sense as well, while protecting their own interests.

 

  1. Can I talk to the founders of failed companies in your portfolio?

This is a good way to check how the investor deals with startup failure. You want to hear those entrepreneurs to tell stories of persistence and support in tough times.

  1. What kind of follow-on investment do you think the company needs to succeed?

It is important to be aligned in the targets of fundraising in subsequent rounds. This question may be hard to answer within the initial discussions, though, so leave it to later stages of the negotiation.

 

  1. What is your end game?

It is important to know how the investor’s end game is aligned with yours, whether you look to build a company that sells for $50M in 2 years or a billion dollar standalone business.

At the end, entrepreneur’s choice is limited by the interest of the investors.

Some celebrity entrepreneurs can pick and choose the investors to work with, but for most entrepreneurs, it is a just choice whether to accept the terms of the investor who offered or not.

StartupStorey - Finding the Right Angel Investor

Things you can do to see if it’s a right fit

  1. Bring someone you trust deeply but who is not in business with you — like a spouse or good friend — to meet the person and give an honest assessment of what that person is actually like without your “investment goggles” on.

Be mindful of any red flags because there is usually something bad there.

  1. Take the investor out to eat in a restaurant and note in particular how he/she treats the staff. If s/he is an a-hole to the waiter or waitress, that’s usually an inherent character flaw.
  2. Ask them upfront how often they like to communicate about the business. You want to make sure it’s compatible with your own communication style. I kid you not, some investors want an hour a week, which seems rather excessive to me.
  3. I also like asking them what their ideal outcome for this investment is.

Is it return on investment? Is it fame and glory? Is it being able to tell people at cocktail parties they invested? No judgment call here — it just helps to know what they’re expecting.

  1. Do blind reference checks. Find the people to ask via LinkedIn. You will learn some of the most interesting things that way.
  2. Ask what makes them happy. I have known investors who have transferred their misery to entrepreneurs, just because they never quite figured out what makes them happy themselves.
  3. Actually ask for advice about something that keeps you up at night. If you’re not happy with the quality of the advice you’re getting, think carefully about whether you’re better off without this person’s money.

StartupStorey - Finding the Right Angel Investor

This is the most important question to ask – Do you understand our business and agree with our approach? Why?

You want to make sure you are on the same page before accepting money.

Ultimately, you want the investor to commit not only money, which is a one-time transaction, but also to commit to the business and approach, which is continuous.

If you accept money from an investor who does not understand your business and/or does not agree with your approach, you are essentially starting out that relationship in an argument (whether you know it or not ).

What do you think about the founding team? Where are our strengths? Where do we need help?

Again, this makes sure the investor is on board with the current status of the company and the team in particular.

 

How involved would you like to get?

You want to make sure expectations of both parties are understood.

You really don’t want to be in the situation where you accept a check from someone who you thought would be a passive investor, content with periodic updates, and the investor starts constantly emailing you asking for updates, setting up intros/meetings, etc.

Or, you may want an investor to help you at that level, but then get an investor who you rarely hear from and doesn’t really return correspondence. If you are looking for an investor to be actively involved in the company, ask for references.

 

What is your investment timeline / When are you looking to get your capital returned?

Many angel investors have a fixed pool of capital to make investments from — i.e. they don’t have a continuously source of fresh, new capital they are using to invest and depend on returns from previous investments to fund future companies.

Venture funds typically have a timeline where they need to return capital to their LPs, which will dictate when they need to look for an exit.

If anything, you want to avoid the situation where an investor is expecting / requiring an exit significantly earlier than you are able/willing to deliver.

StartupStorey - Finding the Right Angel Investor

How do you decide on follow-on investments?

This question is likely more important with a seed fund, particularly a seed fund associated with a VC firm ( The problem with taking seed money from big VCs ).

The signaling issue aside, the answer to this question will also give a glimpse into how the investor judge progress and what level of funding support you will have when ( or maybe if ) you need to raise additional capital.

 

Why are you investing in me?   

Use this question to measure their intention toward you and their understanding of your business, your marketplace, your customers and you.  

If they say “it looks like a good deal.” they are in it for them.  If they say “because I believe in your product and you,” or “I can help” then they are in it for you.

Do you have other investors that you can introduce me to who you think would invest and would be good for the company?

You want investors who can bring good investors in and help close a round or bring follow on investors in for your next round.  Ideally they will also be involved in the next round.

Do you have industry contacts that could help us gain more traction? You want to leverage their networks as much as possible.  

If they can bring you contacts to accelerate the business, it’s that much better. You’ll often find this if you target investors who were leaders in the industry of your customers.  

They often will get your business before others and see the value first.  Having their network to tap is very valuable.

 

What additional milestones do you think we need to hit to effectively close a Series A when the time comes?  

This lets you know if you’re going to get into a struggle with them about getting to the next round.  You want to know early if their notion of your direction and their’s match.

You also want to use this to judge if they trust your leadership.   

They may give you good advice, or they may hint to you that they don’t agree with your leadership.  Fine line there.

 

Are you willing to and how can you help us beyond the financing? Will you have time to help us?   

You want them involved if they are a good investor and you will want them as a sounding board.  If they are a silent investor, that’s okay but not ideal.

If they have expertise and are not willing to apply it, then that’s a red flag.  

If they have expertise and want to share it, you win.   (Of course there is the rare occasion when they think they have expertise and don’t, and still want to share but other questions should uncover this.)

 

What’s your desired exit for your investment?

You want to be aware if they are in it for a quick exit and will push you for that or if they are in it for the long haul with you.   You’re goals for the company have to line up.  

If they say “ROI of 10x” or something simple like that, you’re not going to get support and you’ll get advice that will steer you toward returning their money vs building the business for the long term.

Here is a sample of how I would communicate with you, what else do you want to see?    

You’ll get to see what’s important to them and it should either surprise you that you haven’t already measured what they’re asking for or it will show you a misalignment or misunderstanding.  

You might get additional insights or you will get an indication that they’re not a match.
I will assume you’ve done your diligence up front on the investor and know what’s in their portfolio, understand what exits they’ve gone through and what their investment thesis is.     

If you’re having this conversation, I will also assume that they have already determined that they want to write you a check.    

All of these questions are to determine whether or not you should take it.

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