Critical factors in the investment decision
In a recent survey, angel investors and venture capitalists were asked
to rank the most important factors when valuing a company prior to investment. These
factors were ranked from 1 (most important) to 7 (least important). The following
chart illustrates these differences:
Angel Investors
Venture Capitalists
Factors
Points
Points
Rank
Rank
Quality Management
7.1
1
1
5.4
Growth Potential
4.7
2
2
4.2
4.2
4.2
4.2
4
4
4
4
Proprietary Product
4.4
4.4
3
3
Market Size
4.3
4.6
Barriers to Entry
5
4.1
7
7
Competition
4.0
6
Return on Investment
3.9
Table 1: How Angel Investors and Venture Capitalists Value
Potential Companies
Taken from Brian E. Hill and Dee Powersâ Attracting Capital from Angels: How
Their Money and Their Experience Can Help You Build a Successful Company,
2002.
The results and what it means to the entrepreneur
Even though both groups of investors ranked the factors differently, the
table above (Table 1) illustrates that both angels and venture capitalists mostly
rely on the top four mentioned aspects (quality management, growth potential, product,
and size of the market) when deciding on an investment. In addition, quality management
had a higher average point score by angels than venture capitalists (7.1 versus
5.4). This distinction can be attributed to that fact that most angels tend to invest
in a companyâs early stages. Perhaps that is why they feel the management
team is more important when compared to venture capitalists.
In order to successfully raise angel capital, entrepreneurs need to demonstrate
the quality of their management team, focus on the potential growth of their company,
define their market, prove that the size of their market is large, and that their
unique product or service fills a need in the current market.
Due diligence differences
The same survey also revealed time differences in conducting due diligence.
On average, most angel investors claim that it takes them approximately 67 days
to close a deal whereas venture capitalists take an average of 80 days. This two
week difference between both groups of investors can be accounted for different
reasons. Â One rationale is because VCs have to perform a more extended, careful
analysis on their potential investments since they invest more money in a given
company and have to answer to their partners who supplied the money to their firm.
Their method of due diligence takes on a more complex and formalized approach (have
hired staff or human capital) in order to ensure the success of their investments.
As a result, their role is more of a wise money manager rather than as individuals
who have to decide on investments on their own.
Angels, on the other hand, do not have the supportive staff (lawyers, accountants,
technical experts) as venture capitalists do, so they are often left to conduct
due diligence of a company themselves. Since they invest less money into businesses,
their due diligence processes much quicker than VCs. They also do not have to rely
on paid consultants as VCs do, which results in a more prompt and timely evaluation
of a potential company. When angels invest as a group, they are able to spread their
due diligence tasks among all organization members, further expediting the process
of evaluation. Â
Due diligence in angel groups
One of the benefits of establishing angel investor groups is that the entire
organization can be actively involved in an investment, including all angel members
who conducted a due diligence process of a potential company. The angel network
of investors can divide amongst themselves the different due diligence duties, greatly
removing the weight of responsibilities and time from an individual investor. In
the same respect, each angel member can receive the benefit of all the other angelsâ
experience and perspectives.
Angels who invest in groups usually look for investments where at least one member
of the group has industry expertise. This allows a better understanding when evaluating
the risk versus reward of an investment. This will also enable the angel group to
provide more valuable experience to a young company after the close of a deal.
As mentioned, angels do not have the luxury of having a team of resources as VCs
do in conducting a timely due diligence process. Here are some ways in which angel
investors assess a company:
An angelâs due diligence plays a vital role in potential investments. By examining
market and industry trends, the competitive outlook for a company, and the profiles
of the founders and management team, the angel investor can assure the deal is legitimate
and establish a foundation for future investment and growth. In addition, due diligence
can address potentially significant areas of concern before any litigation can occur.