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5 Things Angel Investors Should Look for in Startups

An early-stage company that shares these attributes may be the one that makes you rich.

If you're an angel investor, you probably have some insight into the mind of an entrepreneur. After all, you too were at one time an entrepreneur. However, that could have been years ago. Or, maybe you were so rattled with nerves that you forgot exactly how you secured that early round of funding.

Now that you're on the other side of the table, here are the five things that angels should be looking for in a startup.

1. An All-Star Team

Angels are more likely to invest in people rather than just ideas. Because of this, angels want to do work with someone that they know or someone who can be vetted. Not only does this help with credibility, it establishes trust as well. Also, since angels are working directly with the team, it wouldn't hurt to make sure that personalities click and everyone can get along.

Besides all of the above, angels should be looking at the entire management or leadership team. Angels need to see a team that has a proven track record of delivering goals on time and that can handle all of the responsibilities that come with a startup.

Silicon Valley Angel Investor John Rampton from Adogy says "If an entrepreneur wants to make an impression, prove that there's past experience and credibility behind the team. It's your team that's going to win me over, not your half-baked idea!"

2. A Completed Business Plan

Make sure that startup has a clear and completed business plan. This means that everything has to be written out. And that means everything. What's the problem that's been solved? What's the business model? What's the market like? Who are the competitors? What advantages are there over the competition? How will the investor make money?

Every professional investor is completely aware that an entrepreneur without a business plan is on the path to failure. Of course, just because a business plan is in place doesn't mean that success is guaranteed. It does, however, illustrate that there's a market and opportunity to make a return. Make sure that the business is also vetted through market research, surveys, or crowdfunding.

3. Appropriate Valuation

While there's no magic number for how much an angel invests, the valuation of a company usually stays the same. Paul Graham states that for angel rounds it's typical to see a valuation that is no lower than half a million dollars or higher than five million dollars. So a common valuation would work like this: "If you put $50,000 into a company at a pre-money valuation of $1 million, then the post-money valuation is $1.05 million, and you get .05/1.05, or 4.76 percent of the company's stock."

If the valuation is outrageous, then this is a sign an entrepreneur has overvalued his or her startup.

4. Integrity

David Rose, founder of the New York Angels investing group and CEO of investment firm Gust, has said that integrity is the number one quality he looks for in entrepreneurs. Rose stated that since everything will go wrong when investing in a startup, the only thing that is for certain is being able to trust the entrepreneur.

This means investing in entrepreneurs who are thrifty, resilient, determined, and passionate. In other words, the entrepreneur should be able to not only lead the team, set goals, and manage a budget, but also rise to the occasion when times get tough.

5. Understanding the Risk

An entrepreneur should be passionate, optimistic, and hopeful for the future. However, an entrepreneur should also be realistic. They should understand that there's a major risk involved for both you and them.

Entrepreneurs who push their startup without respecting the motivation and concerns of an angel prove that they just don't understand the risks that an angel is taking in investing in their startup.

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Last updated: Aug 5, 2014

DREW HENDRICKS | Columnist

Drew Hendricks is a tech, social-media, and environmental addict. He's written for many major publications, such as Forbes and Entrepreneur.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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