As a business angel, your job is to pick startups and founders that stand out from the crowd. Identifying and investing in these founders is the best you can do. Again, the majority of your investments will fail. Some will do well and perhaps even make some profit. One or two will have a massive return on investment which will justify deploying capital in all the startups in your portfolio. It is for this very reason that you need to identify founders who are different, on the fringes, with a surprising world view. These are often the riskiest investments, but they also represent the ones with the most potential.
Before going into the details of evaluating a market opportunity, it is essential to remember that a good founding team will most likely have a different worldview, a different market view, than we do. It is also possible that this team will not fit into traditional codes in terms of experience (unless it is entrepreneurial), education or background. Don't forget to put these elements aside as they could pollute your decision-making processes.
Some ways to assess a market opportunity
- The company can reach a level where it can generate several hundred million euros in revenue in the next 5 years
- If the company is attacking an existing market, the market will be able to accommodate a new company to achieve significant results (if the market is growing strongly, if its structure is changing, if it is possible to disrupt it with a technology or a new way of doing business).
- The company is entering a completely new market that did not exist before. In these cases, it is important to understand how this market will capture value. What product(s) or service(s) is it replacing? Will it change consumer/customer behaviour?
- The timing of the market is right. If you come in too early, you might invest in a great idea that you know will happen in the future - say augmented reality contact lenses - but if it takes many more years of research and development before the product is ready and there is a demand for it, you've missed out. If you come in too late, the market will be saturated with competitors and a new entrant won't be able to make it.
- The company is in a sector that is about to peak in terms of investment and acquisition interest.
- The company is dislocating an existing market, pushing it into insignificance because of the revolution it represents (e.g. what streaming music did to CDs).
- The solution provided by the company is essential, and not just nice to have. It is a painkiller, not a vitamin.
- The impact of the product is important enough that it is not just a feature of another product.
- Major trends - economic, technological, political, regulatory, cultural - feel like they are evolving with the company.
- The company's technology is differentiated, making it difficult for others to copy; the company may have intellectual property protections such as patents, although these are not essential to its success.
- There are no significant risks to be overcome in getting to market, such as establishing a supply chain for expensive materials or approval of medical devices; if there are, the company is uniquely able to overcome these obstacles.
- The company is 'scalable', which means that it can multiply its revenues with minimal additional cost as it grows. Beware of high-tech studio or service models that require more staff to do their work. Software is scalable, people are not.
In all honesty, the due diligence required in Angel Investing is low. The most important factors are the quality of the founders and the size of the market opportunity, and there's not much you can look for to supplement what you learn from meeting and interviewing the founders.
Here is a simple due diligence list you can go through if you need a little organisation:
- Interview the founders. This is where you should spend most of your time. Get to know them: their background, their professional experiences, what they have done well and where they have had difficulties. How have they dealt with adversity in the past? How do they work with others? What makes them tick? What keeps them up at night?
- Use LinkedIn, AngelList or another social network to find connections with founders who were not on their reference list and call them. The discussions you can have with these people will tell you more than the references provided.
- Ask the founders for any technical documentation on their product - white papers, patents, diagrams - and read them. Ask questions about the parts you don't understand.
- Make your own assessment of the potential market. Don't just rely on the founders' claims about its size and dynamics.
- If there is an MVP (minimum viable product), ask for a demonstration. It is better if you can use it on your own, rather than having a founder conduct the experiment.
- A list of all current employees, advisors and investors with their contact details so you can get in touch with them.
- Identify and talk to experts in the company's sector, focusing on what they think of the idea, the scale of the opportunity and any risks you or the founders may not have foreseen.
- For highly technical products (if you are not a technical person yourself), get a third party expert to do an audit to confirm that the product does what it claims to do.
- If the company has an office, visit it and talk to the non-founding employees.
Any questions? Feel free to contact us at firstname.lastname@example.org