Angels

I attended the monthly meeting of the Hawaii Venture Capital Association today. The presentation, by a panel of Angel Investors, focused on the process and the criteria that angel investors use to evaluate businesses and business plans for possible investment. The presentations and the panel of angels were excellent.

A lot of what they had to say I had heard before, but there were still some interesting and informative insights. Since I am definitely not a “high net worth” individual, I am not an angel investor (or any kind of investor, unless buying beer can somehow be considered investing). These people are successful, smart, and talented. Most of them are entrepreneurs themselves, and obviously successful if they are high net worth individuals.

One thing I’ve always wondered about is when, exactly, do angel investors invest in a company. I mean, at what point in the evolution of the company? When it’s just some whiz kid’s idea, when the company is up an running but doesn’t actually produce or sell anything yet, or once it’s already sort of a “real” company? Well, all of the above. Angels typically invest after the founder(s) have exhausted their own funds and tapped out their friends and family, but before they are farther along the growth and maturity scale where they can attract venture capital funding or can fund themselves through their own operations and sales.

The presentation was officially made by the Hawaii Angels organization, but how that works and how angels in general work can be a little confusing to the uninitiated. With the Hawaii Angels, the organization has a process for screening business plans and inviting companies to present live. Business plans are accepted and they go through a first screening. Apparently about half of them are immediately rejected because they are just so bad; amateurish, poorly written, or just plain ridiculous. The ones that pass the first screening are reviewed a little more closely. Still, standards are high and maybe only ten percent or less are invited to give a live pitch to the membership at their monthly meeting.

If the company makes a good pitch and some members are interested in investing, a committee is formed to investigate the company in more detail. I didn’t get all my questions answered, so from that point on I’m a little fuzzy, but I think that the committee then makes a recommendation to the organization to invest or not. But with angels, they are free to invest on their own at any time, and even if the organization (Hawaii Angels) invests, they can still invest more of their own money as an individual.

Investors put their money in a company based on the expectation that they will get it back, plus interest. They expect a return on their investment. Since the companies they invest in are inherently risky (small and new), they expect a pretty high return. To feel better about their risk, they have certain criteria for the company. Of course, each investor is a little different, but they’re all looking at some key areas.

One criterion is the company has the potential to be a big hit. That means could it possibly become a large, profitable, and self-reliant company very quickly, could it be bought by someone else, or could it be taken public (through an IPO, or Initial Public Offering)? Another criteria is that there is a good team leading the company. Investors are wary of a company that doesn’t have a strong team running it. That means that one or two individuals aren’t trying to do everything themselves. For a company to attract funding there has to be experienced or highly competent people in key positions, such as CFO (Chief Financial Officer), Marketing, CTO (Chief Technology Officer), and the CEO. Sometimes, to attract funding the founder has to step down as CEO and hire someone with more experience and ability.

All very interesting, and lots of information I can use when I review business plans and advise entrepreneurs (which I do). I’ll be volunteering as a coach for this year’s UH Business Plan Competition, and I can bring some of these insights to my coaching.