Decoding My Angel Investment Thesis
Angel investors have it tough, especially during a funding winter. They have to build their pipelines and analyze startups. Larger funds have separate teams for doing this, but angel investors still need to.
What makes an Angel Investor’s life easier is having an investment thesis. Most investors I have spoken with (angel or otherwise) have a set thesis. Some look at industries they understand. Recently, Warren Buffet stated that he would never invest in Nike. The reason was that he and Charlie Munger did not understand the business of sport. Other investors look for founders, business models, market sizes, etc. The list goes on.
Over the last few weeks, I have been studying VC funds. The idea was not to get a meeting as a startup. Instead, it was to understand what they invest in. After studying a good number of funds, I have come up with my thesis for angel investment. It will take a few years and several iterations. But, as things stand, this is the first iteration of my thesis. More than a thesis this is my checklist while evaluating startups.
Founder Pedigree — Most VCs I’ve spoken with say that the founder's background is the most important aspect of a pitch deck. Some look at a founder’s education and qualifications. A fund I spoke with earlier this year stated that founders from IITs or IIMs get preferences. This works for first-time founders. Another fund stated that they look exclusively at returning founders. Returning founders are those who have had successful exits from previous startups.
There is no way of determining which is the right way. I suppose it depends on the biases of the individual. Either way, founders play a massive role in businesses. Therefore, this is the first cut I make while evaluating a startup.
Feasibility check and business model — Most early-stage startups pitch to investors at an idea stage. For the most part, they face rejection. And for good reason. I’ve noticed that most startups in the idea stage have little or no validation for their product. Therefore, it isn’t too surprising that they get rejected straightaway.
However, idea/early-stage startups can remedy this by doing primary research. In a previous post, I’ve spoken about how startups fall into the SISP trap. Even if a startup has little or no revenue, doing a feasibility check goes a long way in reinforcing that a business model works.
Other investors — At times, investors look at who the other investors are. For instance, I’ve come across certain Venture Capitalists who only invest if Accel Partners have invested. Another micro VC fund co-invests with Tiger Global. For angel investors, it is important to hedge investments against seasoned VCs or other angels. And, for me, this is a big one.
Roadmap and future goals — Dovetailing from the feasibility check, roadmaps are a critical consideration. Especially for idea/early-stage startups. Of course, no one can articulate what the future looks like. However, it is immensely reassuring when founders are thinking about what their startups look like in the future.
In all, if a startup checks 2 or 3 of these boxes, I’d consider a meeting. At the very least.
