Angel Investment Returns Begin with Selecting A+ Founders
It’s easy to invest in a founder’s business idea or projected financial return. But, how do you assess their ability to build and grow a sustainable business?
I can’t count the number of times I’ve heard fellow angel investors say, “I’ll take an A+ founder with a B+ idea or technology over the opposite” — and they mean it. It’s team over
One of the most common reasons why startups fail is because they lack strong leadership.
In fact, a recent study from the Chartered Management Institute (CMI) found that 56% of businesses failed within three years because of poor leadership.
Many investors look to studies on leadership traits by Bloomberg and Gallup to evaluate investment opportunities but, unfortunately, they don't provide the complete picture. For the most part, investors rely on gut instinct, a measure that’s more art than science, when assessing a founder.
This is why I’m sharing some effective strategies that I’ve gathered over the years while working with York Angel Investors. These strategies are valuable for any angel investor who wants to assess a founder during the due diligence process and will help improve the probability of receiving angel investment returns.
1. Quickly identify red flags
Angels often share their thoughts on various verticals and which qualities or traits they look for when assessing companies and founders. However, few have written about what they don’t want to see!
But, it is very important to have a wish list and a non-wish list — a red flag list with specific warning signs that pertain to founders and the companies they’re starting.
In my experience, the strongest founders have three key traits: they show an affinity for performing well under stress, they have a high level of integrity, and they are open to coaching. Keep the selection process simple by removing founders who do not possess these traits from your short list.
- Performs well under stress: A telltale sign of a successful founder is that they react rationally to stress and work towards solving problems. Get to know the entrepreneur, not just their numbers. Angels who take a nondirective approach during the deal screening process have a better chance of observing clues that will determine whether a founder has these traits.
Ask questions and make suggestions to create an environment for observing the entrepreneur’s authentic style. Do they listen? How do they handle new information? Do their answers show that they’re wired to solve problems in a rational, objective way or myopically, without seeking advice?
- Has a high level of integrity: This is challenging to identify and I wish the process were scientific, but we tend to rely on our intuitive, gut feeling. To balance your gut instinct, review references, check the founder’s social media
accounts,and ask around. The founder may have participated in an incubator or accelerator program, or received government funding. Do this early in the investment process to surface any potential issues quickly. If you feel the need, you can also conduct a background and credit check.
- Is open to coaching: Ask yourself, “is this individual looking for guidance?” We look for founders who are the rare combination of strong, independent, and open-minded. If your assessment is “no,” then the deal should not be pursued. Coachable entrepreneurs tend to be highly capital efficient, adopt best practices, seek advice from their board, and focus on the milestones that remove risk and help their company succeed.
When startup founders are oblivious to their weaknesses, they can lose respect from their team and target markets. What’s a startup founder without engaged employees, brand ambassadors, and solid customers? A lot of hype with very little return.
Founders can’t do everything on their own and no one wants to work for a tyrant, no matter how large the promised payoff is. Even some of Steve Job’s earliest employees have gone on record saying that they still wouldn’t have continued working for him even if they knew how successful they would have become.
“Some of my very best friends in Apple, the most creative people in Apple who worked on the Macintosh, almost all of them said they would never, ever work for Steve Jobs again. It was that bad.”
- Steve Wozniak, Co-Founder of Apple
So, how do angels spot a self-aware startup founder? If a founder can accept a critique of their product, team, or business plan then they are likely very self-aware. If they are unable to accept outside help or cannot understand that a skill set may be outside their sweet spot then they may lack self-awareness.
We once had a founder who stormed out of a screening meeting, cursed, and slammed doors over a minor suggestion. That did not instill a great deal of confidence in how relations would be if the company ever entered a difficult period.
Ask the founder to list their weaknesses and those of their team and products. Furthermore, ask them what their plans are for these “opportunities”.
You should also ask them what their plans are for the money. “Acceleration” is not a complete answer. Your founders need to provide detailed plans of how your investment will be spent and how it will grow their product, mission, and customer base.
3. Network with founders in advance
Many angels invest in startups that are within driving distance of their home or office. In other words, much like Newton’s law of inertia, investors in the West tend to stay in the West and angels near the ocean tend to invest near the ocean.
This fact creates multiple opportunities for you to get to know your region’s founders long before deals take shape. Use this time to observe founders on their feet by judging business plan competitions and attending pitch events.
Be present where entrepreneurs congregate — economic development organizations, business schools, networking events, etc. — and build a regional startup ecosystem network that includes accelerators, incubators, attorneys, and other professionals who help entrepreneurs and innovators.
At York Angel Investors we do a lot of community outreach and get to know founders through some amazing
- Fireside Conference - an amazing, immersive weekend away with investors, founders, and influencers
- VA - YAI Basecamp - Empowering Entrepreneurs to Raise Effectively (next event is May 15/16/17th)
- OPN PitchIt events - regular pitching for feedback events around the GTA
- VentureLAB, Toronto Starts,
StartUpDrinks, StartUp York, Startup Durham, and Tech TO all run events that help investors and entrepreneurs connect.
- Judging various pitch competitions.
- Working closely with Launch YU, Y Space, York University BEST Lab, and Seneca Helix on various programs and panels.
- Collaborating with Smith Business School at Queen’s University on opportunities to interact with Master of Management, Innovation and Entrepreneurship Program.
4. Know your definition of an A+ founder going in
Although top angels will use their own successful business experience to define what an A+ founder is, here are some additional guidelines:
- A+ founders are very intelligent, but they also recognize that they’re not the smartest person in the room.
- They are intellectually curious about their business and
industry,and enjoy thought-provoking questions and conversations.
- They can develop and communicate their vision, they are adaptive, and they can sell as their organization changes.
- They are optimistic, but also realistic.
- Most importantly, they are passionate, driven, and high energy.
It’s a plus if the founder has a track record as an entrepreneur; however, new entrepreneurs with passion, energy, and industry knowledge can also be successful. Furthermore, support from incubator and accelerator programs can help mitigate a founder’s lack of experience.
Jess Joss is Executive Director of York Angel Investors Inc., and Partner/Co-Founder of Insiteful Solutions. She advises several startups and also been recently appointed to the National Angel Capital Organization’s Board, as Marketing Chair; and is NACO World Summit Conference Chair.
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