How do Angel Investors choose companies to invest in?

[Dennis Ng]

As I share in my seminar, the main way to become Rich and Richer is through Capital Gains, not through Income (or cashflow) such as dividends from stocks or rental income from property.

Then there are people who do NOT agree with above. (NOT sure why though becos they did NOT back up their disagreement with actual supporting information or numbers, but I can show you the numbers supporting my view.

The other day I have a conversation with a multi-millionaire who also invest into start-ups, or what people termed as "Angel Investors", and these are what he said to me:

1. I primarily invest into start-up, so first few years of operations there is little or no profits, and thus, I'm not investing to get any dividends, but I'm investing to get Capital Gain either when the co goes IPO or is sold to another company.

2. Many start-ups fail, thus how I ensure that overall I make money is that I would only invest if the upside is alot eg. if I invest into a company at start-up stage and may need 5 to 7 years to exit my investment, I would require 10 times Potential Returns (ie. 10 baggers, or 1000% gain on his capital). If I invest mid-way and may need 3 to 5 years to exit my investment, I would require 3 to 5 times potential returns....(ie. 100% per year). By doing so, even if I invest into 10 companies and only 1 or 2 make it, overall, I would make money.

3. On how he chooses company to invest, he said: these are the criteria:

1. the company must have something UNIQUE to offer, or maybe can carve out a Niche that others might not be able to easily copy.
2. the key founders and management must be Passionate about their business, without Passion, one would easily give up.
3. the management must have the Competence to Execute the business plan, they must have the requisite knowledge or experience, I am not interested to try my luck investing into a Newbie.
4. the management must also have significant investment into the company, so if company fails, they will also suffer alot and feel the pain. I will not invest if the management does NOT put their own money at risk into the company.
5. the business must have a sufficient market size so that it can grow probably 5 to 10 times in a few years, thus the business must be scalable. I will not invest into a company that is not scalable.

when I asked so far did he make or lose money overall? He said of course he make, he is not really an Angel, ultimately he is also trying to grow his wealth through investing.

Why invest in such start-up then? Becos other than financing, his vast experience can come in useful to guide the management team, he can sort of "Mentor" up-coming entrepreneurs and he also enjoy a lot of satisfaction seeing the people he mentor grow and develop over time...so this is why he continues to be an "Angel Investor".

Thus, anyone starting a company if you think you can easily get Private Equity or Angel Investors to invest into your company, by now you should know that this is not the case. Read and re-read what I shared above.

[Firefly10]

Hi Dennis,

I have a question and not sure this is the correct place to post this since we are talking about investing in companies. A friend who is starting up an all in one application for deals in the US and is opening for a "friends and family" round for investing.

Background
The US coupon daily deal market is pretty huge. They are saying that Groupon just did an $800M IPO and it’s only going to get bigger. Their goal is to achieve about 250,000 users over the next 24 months and then sell the company, for what they think will be significant number. The application is at Beta mode and available on iTunes now and starting to get some users and starting to make money already. They feel that now it’s time to spend money on marketing and advertising and so they’re raising a little more money to do that. They have initially raised about $50k in what’s called a “Friends and Family” round at a “$400k” valuation to pay to build programme over the past 7 months and hire a PR team. That lower valuation of $400k made it possible for stockholders to invest a smaller amount of money and receive a nice amount of stock for it.

Their next phase is marketing and advertising and adding some more cool social features to the app and so soon, they will be raising a bit more money through larger institutional investors like a Venture Capital at a much higher valuation, which means that a $5k investment would get less stock then at $400k valuation.

Now, they are opening up to the 2nd round to raise up to $65,000 and thereafter they will close it and raise the valuation to US$2.5 million for future funding. They have one main competitor who raised $6Million at a high valuation from a large Venture Capital firm and hence they feel very positive about this.

Ultimately, they hope to go IPO like Groupon or sell the company for a good sum of money.

Today, a few of the US media has run the story on this application.

I was asked to invest a minimum of US$5,000 for about 12,500 shares and will get a stock certificate. I have personally declined because of the following reason:

1. I am based in Singapore. So it would be hard to keep track.
2. Even at my US$5,000 and it has raised to 6X ( because they are raising their valuation to US$2.5 Million), I believe if the opportunity is right, I can make the same money in stocks?
3. Afraid of Technology bubble and this is something which I am not familiar with.

What are your thoughts on this?

[Dennis Ng]

Hi Dennis,

I have a question and not sure this is the correct place to post this since we are talking about investing in companies. A friend who is starting up an all in one application for deals in the US and is opening for a "friends and family" round for investing.

Background
The US coupon daily deal market is pretty huge. They are saying that Groupon just did an $800M IPO and it’s only going to get bigger. Their goal is to achieve about 250,000 users over the next 24 months and then sell the company, for what they think will be significant number. The application is at Beta mode and available on iTunes now and starting to get some users and starting to make money already. They feel that now it’s time to spend money on marketing and advertising and so they’re raising a little more money to do that. They have initially raised about $50k in what’s called a “Friends and Family” round at a “$400k” valuation to pay to build programme over the past 7 months and hire a PR team. That lower valuation of $400k made it possible for stockholders to invest a smaller amount of money and receive a nice amount of stock for it.

Their next phase is marketing and advertising and adding some more cool social features to the app and so soon, they will be raising a bit more money through larger institutional investors like a Venture Capital at a much higher valuation, which means that a $5k investment would get less stock then at $400k valuation.

Now, they are opening up to the 2nd round to raise up to $65,000 and thereafter they will close it and raise the valuation to US$2.5 million for future funding. They have one main competitor who raised $6Million at a high valuation from a large Venture Capital firm and hence they feel very positive about this.

Ultimately, they hope to go IPO like Groupon or sell the company for a good sum of money.

Today, a few of the US media has run the story on this application.

I was asked to invest a minimum of US$5,000 for about 12,500 shares and will get a stock certificate. I have personally declined because of the following reason:

1. I am based in Singapore. So it would be hard to keep track.
2. Even at my US$5,000 and it has raised to 6X ( because they are raising their valuation to US$2.5 Million), I believe if the opportunity is right, I can make the same money in stocks?
3. Afraid of Technology bubble and this is something which I am not familiar with.

What are your thoughts on this?

for a Groupon to succeed, there are many wannabes that failed. For every search engine that tried to be Google, in the end, even Yahoo and MSN (early movers in search engine) lost to Google.

The coupon opportunity thing is NOT a new thing, even in Singapore, now there are many copycats of Groupon...I don't know about how many copycats are there in U.S. and how successful they can be.

Groupon is growing and growing? Really? Groupon posts 4th quarter loss:

http://www.marketinghands.com.au/groupo ... e-skids-2/

I don't know how to assess this. If you do, then make your own decision.

The questions I shared what Angel Investors look at a company before they decide to invest, can be used as a very useful reference tool for you to assess the opportunity already.

Investing S$5k, is it a big risk? As the angel investor shared, out of 10 investments, they can only expect 1 or 2 to make it, the rest will either fail or just mediocre. So it depends on how much money you have to invest. If this is more than 10% of your investible funds, then you're making a sizeable investment (as percentage of your investible funds) which means you are very confident in the venture.

At the end of the day, we might be right or wrong. The more important thing is how we make our decision, if it is based on a Systems and Method and Strategy that works, then it is ok to make 6 losses out of 10 investments and we can still become Richer. But if it is just made based on feelings, emotions or a hunch, then this person is just gambling, and NOT investing, even if he/she makes money this time round, it does not mean that he/she can CONSISTENTLY make money and he/she may not become Richer and Richer without consistency.

Wealth is a Marathon race, not a 100 m Race. A person does NOT focus on running the fastest in a 100 m in a Marathon race. It is who reaches the finishing line (Financial Freedom) that really matter. And we are not even competing with others, we are just trying to be the Best that we can be, so we are not even aiming to be first in Marathon. Each person runs his/her own Marathon, not in competition with anybody. Everyone has a chance to finish a Marathon, provided he/she has enough Stamina and Will Power (so everyone can become Financially FREE actually)...it is possible, that's why Wealth is NOT a Win/Lose game, but can be Win/Win (eg. Leverage and Synergy of research of Investing Learning Groups).

[Firefly10]

thanks Dennis.

Yes, I personally find that 5k in my investable portfolio is quite substantial and hence I held back. I rather invest it in other instruments that I am more familiar with.

[Dennis Ng]

thanks Dennis.

Yes, I personally find that 5k in my investable portfolio is quite substantial and hence I held back. I rather invest it in other instruments that I am more familiar with.

Great! It shows that you have thought things through.

As I said, the reason for investing or not investing can be more important than whether we make money or not from that investment.