I’m an active angel investor, focusing mostly on early-revenue companies with over 185 companies currently in my portfolio.
Many entrepreneurs want to know what I look for in an angel investment. A very good question since every entrepreneur wants to get funded.
I primarily invest in pre-seed and seed-stage technology companies and generally look for three things:
(1) Is this a Big Idea?
Can your business grow to $100M in ARR (Annual Recurring Revenue) within a half-dozen years? Companies of this size can always IPO or be acquired at an attractive multiple of revenue or earnings, which is how I get paid as an angel investor.
In contrast, stable businesses with less than $25M in annual revenue – my working definition of a lifestyle business – are difficult to sell at attractive multiples. Businesses without a high growth rate are unattractive.
(2) Is your management team capable of growing your business to $100M revenue?
I’ve found through painful experience you can’t hire an entrepreneur, so I have to believe you have the juice to grow the business to that size. At $100M you can hire professional managers to grow from there, but in my experience, you can’t hire entrepreneurs who can grow it to the first $100M in revenue.
While that’s hard to quantify, I never invest in anyone I wouldn’t work for. As a serial entrepreneur myself, I would not work for just anybody. You must be a true leader. To get me excited, you must articulate a compelling vision, have great people management skills that inspires the best in your employees, and you must be someone who confidently and efficiently executes.
Age isn’t a factor. I’ve invested in 23-year-olds I would love to work with and passed on 50-year-olds I just don’t think will ever cross the finish line.
You must have juice.
(3) Do you have customer traction?
I invest in businesses, not products, and businesses have customers. If you don’t have customers, then you’re too early for me. Kindly return when you have some customers.
Many companies approach me for investment so they can launch their completed product. They’re effectively asking me to take on the financial risk of determining whether there’s any market for their product or service. Thanks, but I’ll pass.
I want referenceable customers I can call who can tell me what they like about your company, product, or service. It’s unlikely I’m an expert in your area, so I need others who can tell me, and what better way than speaking to those who have spent their money to solve a real problem.
Even if you have a long-sales cycle product or service, there are ways to demonstrate customer traction. You can get signed LOIs (letters of intent), start POCs (proofs of concept) with trial customers or even get downloads of your new app.
One way or the other, show me someone wants your product or service.
(4) Are you capital efficient?
As a startup, you must make every dollar count. That’s doubly important because it’s my dollars you’re spending once I invest! And the more you waste, the more you dilute both of us in future financing rounds.
Most successful startups run lean, postponing all but the most urgent hiring until they’ve proven product-market fit and other key milestones.
As they say, “squeeze the nickel until the Indian is riding the buffalo!”
(5) Do you have profit-product-market fit?
Most entrepreneurs understand the importance of demonstrating product-market fit as a key step in their company’s life especially when fundraising.
More important, in my opinion, is profit-market fit. Anyone can spend $10 to generate $1 of revenue, but truly scalable businesses figure out how to spend $1 to generate $10. Right-side up unit economics is the key to scalability, and it’s essential to figure this out before stepping on the gas.
(6) What is your path to profitability?
Profitable companies rarely go out of business. I understand it may take a round or two of financing to scale your product and business to profitability, but if you anticipate profitability only after Series E or F then I can almost guarantee you’ll never become profitable.
If you reach Series E, then I can tell you what’s going to happen. The VCs that invested in you will fire you as CEO and replace you with an experienced operator who will focus almost exclusively on getting profitable.
So why not avoid that drama and get profitable yourself before your investors force you to?
Product-Market Fit == Profitability
(7) Do you have low-cost sales and marketing?
Most successful startups have a low-cost sales and marketing strategy. Something out of the ordinary. A cheap non-traditional backdoor way of reaching customers.
Throwing gobs of money at sales and marketing isn’t the answer. Do you have significant partnerships or unconventional sales channels?
If your strategy is buying Google and Facebook ads, well then good luck to you! I’ll buy a few more shares of Google and Facebook instead. It’s a much better bet than your deal.
Consider getting your biggest customers to fund product development. If they’re unwilling, then are they actually enthusiastic about your product or service or just paying you lip service?
(8) Will I make 20X on my investment?
Angel / VC investing is a hit record business, so the valuation must be right, and pre-seed and seed-stage investments are very risky, so the 1-in-10 that pays out 20X has to cover the cost of all the others that go to zero.
That’s it in a nutshell: Big Idea – You have the juice – 20X Return
About Me
Alan Fisher is a serial entrepreneur and active technology investor. He co-founded and took public two technology companies in the 1990’s and more recently has been working on a financial technology startup.
Mr. Fisher has been a board member of several public companies, including Egghead.com (N:EGGS), Onsale (N:ONSL), Fatbrain.com (N:FATB) and Infodata Systems, Inc. (N:INFD), as well as a number of privately held companies.
Mr. Fisher has an MS in Electrical Engineering from Stanford University and a BS in Electrical Engineering from the University of Missouri. He also holds 16 patents and is the author of “CASE: Computer Aided Software Engineering”, published by John Wiley & Sons.
Extremely informative article,I now have clarity on what will qualify my startup for investment.Thank you.
Best regards,
Delali kukah