partially adapted from "Angel Investing", by Osnabrugge, M.V. and Robinson, R.J., 2000

Search Tips for Business Angels Setting Your Investment Criteria Starting Your Search Screening Investment Opportunities

Search Tips for Business Angels

1. Investors must truly decide whether they want and are able to assume the high risk of business angel investing. They should realize that allocating only a small portion of their investment portfolio (say, 5-15%) may be the best way to get started in the entrepreneurial investment arena. Setting a rough investment limit controls initial risks exposure and frees up some money for additional expansion funds if investments are successful. Staging investment over time is one way to reduce the risks of business angel investing. Many angels call the funds the invest "casino money" since if they lose them or make a small return, it will not affect their standard of living - but they might hit the jackpot.

2. Investors should determine in which industry sectors they feel most comfortable. Many business angels prefer to invest in sectors in which they have experience since it them to contribute assistance to the firm and judge the risks of the investment well. When investors chose sectors they just don't understand (such as high-tech) they often, to their complete surprise, lose their investment within a short period.

3. Decide whether you would feel more comfortable investing alone or in a syndicate with other angels or personal acquaintances. Many angels are motivated to invest in part by the opportunity to share investment risk and expertise with others. Others prefer to give active hands-on assistance to their investments and may prefer to invest alone (or with one other person) so that they have more control and potentially fewer differing opinions (and egos) to deal with.

4. Investors should determine how they are best able (and most prefer) to assist a potential investee firm. Being up front in responding to an entrepreneur's wishes and needs allows both parties to form realistic expectations and accommodate one another's desires. All too often, we see investors and entrepreneurs signing a deal oblivious to a stark mismatch between the level of hands-on investor assistance offered and that desired. This may lead to much tension that could be avoided if intentions are made clear from the start.

5. Investors should be familiar with the investment criteria of their peers so that they can judge and investment opportunity's merits on unbiased grounds, rather than getting swept up by their emotions and gut feeling. In fact, one of the most common postinvestment complaints heard from business angels is that they should have analyzed their investee firms much more closely before investing. The need for careful due diligence cannot be stressed too strongly.

6. Investors in search of entrepreneurial opportunities should employ their network contacts to locate firms worthy of consideration.

Setting Your Investment Criteria (questions to ask yourself before starting the search process):

• Overall, how willing am I to invest in business angel deals?
• How many angel investments do I want to make in total? How much money am I willing to risk per deal?
• In what industry sector(s) am I most experienced and most comfortable investing?
• How far am I willing to travel to help my investment?
• Am I more comfortable investing with others, or by myself?
• Realistically, what potential returns am I looking for in an investment deal?
• What basic characteristics am I looking for in the entrepreneur? the product? the target market? the overall business plan?
• Which issues are most important to me, and which am I willing to compromise on?

Starting Your Search

• Which of my personal friends or business associates might have the network contacts to help me find some potentially attractive angel opportunities?
• Should I try to join an angel syndicate so that I can co-invest with others?
• What do other investors in the area have to say about these services?
• What aspects of the search do I really need help and guidance with?
• Rather than waiting to find a suitable early stage firm, are there any impressive young ventures in the area that I may want to approach with an unsolicited offer for funding?

Screening Investment Opportunities

• Who referred this opportunity to me? Do I fully trust their recommendations?
• Do I understand and have experience in this industry sector?
• What makes this investment opportunity unique among all the others?
• What kind of investment return can I realistically expect to receive?
• How much money are the entrepreneurs looking for? How much equity are they willing to surrender in return?
• What are the most likely exit routes for this investment opportunity?
• Overall, does this investment opportunity fit well with my investment criteria?