Wednesday, April 9, 2014

3 Ways to Identify a Good Angel Investment

Just like most business owners, I hate wasting time. As an angel investor I’m often forced to decide if I am going to invest my money into somebody else’s business. After sitting through hundreds of investment proposals, I’ve developed a pretty strong ability to determine if a plan has potential or is a waste of time. I thought I would share some of the things I look for in a strong business deal to help you make sound investment decisions.

1 – Direct Involvement

I’m done investing in any companies without being directly involved. If I’m investing in a company, I’m looking for a controlling interest, board seat or, at least, maintaining close contact and proximity to the day-to-day operation. Out of sight, out of mind holds true too often. If you invest your money and the business is out of your sight, it can quickly slip out of your mind. Before you know it, eight months have passed without really knowing what is going on. When you call to check in, it’s easy to hear “things are moving along nicely, it’s coming together.” You get lip service. If a business is on the other side of the country, I’m not going to fly over every week to drop in and make sure things are going well. I’m not suggesting this is the only way to invest in businesses. I’m suggesting this is how I have decided to invest in businesses.
When a business is courting you for investment they are EXTREMELY attentive. Once they get the investment, there is a tendency for that attention and communication to dissipate. That is unless, you stay in close proximity. The best incubator groups in the world work in collaborative environments with their investment partners and mentors. In summary, I like to do deals I can stay involved in and be around.

2 – Due Diligence

When people come up with a “good idea” they seem to instantly start persuading others to agree with them. In reality, they should be asking others IF it is a good idea. Due diligence and feasibility studying seem to be the lost arts of entrepreneurship. 7 out of 10 business presentations I sit through have no track record or self conducted market research. I do see plenty of Google search results. Google search results don’t show me any proof that what you’re going to do, or doing, will work. Just watch Shark Tank. The potential investors always ask, “How many of these have you sold?” Show me a sales track record. Show me that you’ve tried to succeed on your own before seeking investment. Show me that you’ve put some of your own money into your project. It always fascinates me how easily people can justify putting other people’s money at risk without putting any skin in the game. If I’m going to invest in a business, I want a partner that is willing to invest their money as well. Businesses are built on partnerships. If you want a successful partnership and business, you’d better do your research and make sure it’s worth your time.

3 – Integrity

Investing in a business is actually investing in a person, or people, tasked with executing a business plan. You can buy a business plan but without the right people it will never develop. The number one thing I look for in an investment opportunity is a person or team that is committed to success. They must have high integrity. They must have the proven capability or potential to succeed. It is important to know the history of a company and management team before investing. Many times, frustrated entrepreneurs will shop for bailouts or new deals if they are under financial duress or in a disagreement with previous investors. The last thing you want is a lawsuit ridden, cash strapped investment. Do background checks, check references, ask thought provoking questions and analyze responses. Spend time getting to know your investment. Always know before you go.
The world is filled with people that will try to convince you to give them your money. Television and radio are filled with items marketed to you by people that want your money. Individuals and businesses seeking investment are no different than QVC salespeople. Their objective is to get your money in their hands. Make sure you protect yourself by staying involved, working with companies that have completed thorough due diligence and have integrity. Remember, it is not your obligation to hand out investment capital. If a deal does not meet your standards, kindly suggest improvements and move on. It is too easy to lose precious hours on pipe dreams and ideas. Do your homework and make your time count.

What do you look for when evaluating an investment opportunity?

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