What are some red flags for people new to angel investing? originally appeared on Quora - the place to gain and share knowledge, empowering people to learn from others and better understand the world.

Answer by Patrick Mathieson, venture investor at Toba Capital, on Quora:

  1. Invest in the idea, as opposed to the founders. Big rookie mistake for early stage investors is to think "this is such a good idea... I'm so-so on the founding team, but the idea is too good to pass up" and then invest in that company. Bad. Bad. Bad. At the angel stage you are exclusively investing in people. Not the company. The people.
  2. Beware of pitches that heavily feature the investor syndicate. It doesn't matter who else is investing -- if you allow yourself to be swayed by social proof, then you're allowing yourself to be enticed into a shell game. Why the f#$% should you care that Jared Leto is investing?
  3. Flattery is a red flag. I saw this in a pitch (addressed to someone else) just the other day: "We have several top VC firms lined up to fund, but the founder would prefer more value-added investors like yourself to participate instead". This is a combo of social proof + flattery + faux urgency ("call in the next 10 minutes before this offer expires!") and it's almost definitely BS.
  4. Confusing pitch; confusing deck; confusing website. Every interaction you have with an early stage company is a signal of the entrepreneurs' ability to communicate -- and communication skills may be the #1 predictor of a company's future success. If you're perplexed by their pitch, or if you can't figure out what they do from their website, then it's likely that their customers will feel the same way too. (Note that this is different from design-- some of the best companies started out with the ugliest pitch decks and ugliest websites. But even though they were ugly, they were clear.)
  5. Promises about future returns. The only truthful returns projection you should ever hear at the angel stage is "the most likely outcome is that this company will fail and you will lose all your money; but if we don't fail, you'll be extremely happy that you invested."
  6. Promises about future involvement with the company. This is used on Silicon Valley outsiders: "We'll keep you super involved with the company and you'll get to see the inner workings of a real startup." This is likely either 1) a lie, or 2) a signal of crappy priorities. If it's a lie (1), you should ask yourself "why does this person feel the need to deliver this lie to convince me to invest?". If it's not a lie (2), you should ask yourself "doesn't this entrepreneur have more important work to do than looping his angel investor in on the minutiae of his business?".

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Published on: Oct 26, 2018