Seven Key Ques ons to Screen Investment Opportuni es for ... · Earlier-stage ˚rms with clear protectable intellectual property are of interest but ideally companies should be in

Seven Key Ques�ons to Screen Investment Opportuni�es for Angel Groups

Question 1: Is this a good deal for our Angel group?

Industry Sector: Angel investment groups generally focus on high-growth industry within the range of expertise o�ered within their Angel membership. With the exception of sector-speci�c groups, industry preferences are generally de�ned by industry exclusions. Sectors typically excluded from consideration include: partnerships, proprietorships, franchisees, investment funds, retail stores, publishing, professional or consulting services, real estate, entertainment (television/�lm/theatre production, restaurants, athletic & recreational facilities, etc.), natural resources (agriculture & agribusiness, mining & mineral exploration, energy generation & oil/gas production, etc.). As a best practice, the industry focus should be delineated at the formation stage of the Angel group to re�ect the experience and comfort of the core Angel membership.

Stage of Product Development: Stage of development is a critical consideration. It is a fairly widely held myth that business Angels and Angel groups invest in ideas or concept-stage opportunities. Over the past decade there have been a few investments in very early stage deals but these have invariably been in management teams with a track record of growing companies that have provided exceptionally pro�table exits for their investors.

Earlier-stage �rms with clear protectable intellectual property are of interest but ideally companies should be in beta trials, have purchase orders, or an existing customer base. For many industries, including software and Web 2.0 models, completion of the product development is relatively inexpensive so “proof-of-concept” is re�ected in actual revenue and client numbers.

It is also useful to note timelines regarding the products development – if it takes seven years to get through alpha, this does not re�ect well on the team’s ability to commercialize the product and execute the business plan.

Geographic Location of the Company (or Company’s Head O�ce): As a general practice, Angels invest in companies within a one or two-hour driving radius of their homes. This enables ready access to the company founders during the due diligence e�ort and after the investment is made.

Angel groups often also consider more distant companies that have already raised Angel capital from a “known” Angel group in their own local community. A good deal is a good deal and shouldn’t be discarded simply because of some arbitrary geographic boundary. Still, there are some clear red �ags. Companies headquartered in Angel-capital-rich areas, such as

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California, Massachusetts, or British Columbia, should be able to raise plenty of capital locally unless something is “o�” with their opportunity.

Referral Sources: Ideally, as an Angel group’s investment portfolio develops, the professional service providers serving early-stage, high-growth potential companies will become the primary source for an ongoing supply of quality deal �ow. As a best practice for deal screening, it is expedient to place a quick phone call to connect with the referring agent and verify their support for the company. Over time, with a strong network of referring agents, companies referred by those who consistently recommend quality deals can quickly be sorted to the top of the pile for the �nal screen.

Existing Investors: Any company that has already raised signi�cant capital from friends, family, and other Angels deserves a closer look and should get promoted to the top of the pile for the �nal screen. In Ontario, it is expected that technology-based companies will have already raised $50k+ from friends and family and received funding through a third party such as IRAP.

Willingness to work with the Angel group process: As a best practice, it is important to send an immediate email communication upon the receipt of any incomplete submission, simply stating that in order to receive consideration a complete submission is required, along with an invitation to the applicant to reapply. Practically speaking, if the requirement of an application form and/or other speci�ed materials is perceived as too onerous, the management team will likely not be a top target.

Question 2: Is this the right team to execute this business?

Ultimately, the investment decision hinges on the Angel’s degree of con�dence in the management team. A superior product and large market with the potential for a pro�table exit are all required components of any Angel investment, but it is the management team that can make or break any deal. At the initial screening stage, when dealing primarily with documents, it is di�cult to gauge the personal attributes of the lead entrepreneur. But the documents should re�ect the track record of key team members.

There should be a balance of operational expertise (including �nancial), domain knowledge, and business acumen (including capital markets), though the team does not necessarily need to have all these capabilities from the outset. Angel investors can often be relied upon to help round out the team’s management capabilities through their own e�orts, or can help to source the right people through their business networks. Ideally, Angel groups look for experienced and passionate teams with relevant industry expertise, a clean reputation, technical capability, enthusiasm, and a willingness to seek out mentorship.


With respect to teams, it is worth noting that there are two primary categories of companies that are not appropriate for Angel groups:

"# The “one-man-show”: Any company that could be completely wiped out in the event the lone business or technology expert becomes ill or injured is simply too high-risk.

$# The Family-based business: Long experience in dealing with family-based businesses has led venture capitalists and Angels alike to avoid these opportunities under many circumstances.

Regarding complete submissions, note the entrepreneur’s attention to detail. Are they able to clearly and concisely articulate what it is they are doing and how they intend to make money?

Question 3: Does this business have superior proprietary products?

Typically, Angel groups focus on technology opportunities, but Angels with strong marketing backgrounds (usually well-represented in Angel groups) will often consider the “right” services opportunity. The key question when it comes to screening is the ability of the company to scale.

Competitive Analysis: It is absolutely essential for any company to recognize not only that they have competition but to be able to clearly di�erentiate themselves from competitors. Angels are looking for incremental change in the order of 10X (better/faster/smaller/cheaper). They will also assess the nature of the competition (is there an 800-pound gorilla?), and the degree to which competition can be expected within the �rst two years. Note that products that represent a paradigm shift in the market, especially those opportunities that require an entirely new market be created, are better left to the deeper pockets of the formal venture capital industry.

Sustainable Competitive Advantage: Angels are looking for companies whose product or service has a strong intellectual property position or other signi�cant barriers to entry that a competitor would have di�culty overcoming.

Freedom to Operate: Although this issue is usually dealt with in detail at the due diligence stage, care should be taken to note if the technology developers have recent employment histories with companies active in the same technology sector.

Product Line: Companies should have the technical ability to develop follow-on products. Applicants who have licensed or acquired technology and consequently do not control their technology pose a higher risk to investors.


Question 4: Do the products address a clear need in a large market?

Value Proposition: The submitted documentation should articulate a clear economic value proposition. It is useful to note whether the product is a painkiller (need to have) or a vitamin (nice to have).

Market Size: Is the market large enough to support the revenue projections? Angel groups do not necessarily require the venture capital industry’s minimum $1 billion annual market. It is often prudent to consider companies that, while unlikely to capture follow-on venture capital �nancing, can reasonably capture a majority position in a $100 million market, if there exist reasonable exit opportunities.

Market Segment: Has the company identi�ed one or more niche market(s) in which there is a reasonable chance of market acceptance for the product? As well, has the company correctly identi�ed who will be making the purchasing decision on the product/service (as opposed to the end users)? Is this group targetable with a minimal marketing e�ort?

Sales: Does the company have paying customers or beta users as a reference?

Question 5: Is the requested investment su�cient for the company to achieve key milestones?

The capital being sought by the company should be su�cient to achieve a set of milestones that would either make them attractive for follow-on venture investment or bring them to cash �ow break-even.

Sometimes, particularly in capital-intensive industry sectors such as life science or alternative power, relatively small capital injections are needed to achieve a speci�c milestone (usually a regulatory approval step). Once achieved, these companies are within reach of formal venture investing, after which a larger amount is required to bring the product to market. Angel groups that do not specialize in these sectors tend to prefer opportunities that show a reasonable ability to achieve revenue generation based on a single Angel round.

Question 6: Has this company made a compelling case for the overall attractiveness of the business opportunity?

Has the company clearly identi�ed and analyzed its strengths and weaknesses relative to its likely competitors? Are the products or services to be o�ered being developed with the human and �nancial resources the company already has or can reasonably obtain?


Question 7: Is this an attractive investment opportunity?

Valuation Expectations: The company valuation must not be wildly unreasonable. It is unusual for any pre-revenue company to be able to justify a pre-money valuation over $3 million across most sectors, though exceptions do occur where there is substantial intellectual property protection in place. An expectation of twice or even three times higher than that baseline may prove justi�able on further due diligence, and if not, the di�erence falls within the reasonable range for negotiation. That said, any company with a pre-money valuation expectation over $10 million should be rejected outright. Even in the event that this valuation is justi�able, the equity available to an Angel syndicate is not su�cient to warrant the due diligence e�ort.

Potential for Lucrative Exit: When investing in a group, Angels typically seek returns of at least ten times their initial investment within three to seven years, so a clearly articulated exit strategy that would reasonably provide investors with those expected returns is essential.

The Deal: It is relatively unusual for investment opportunities to specify a set valuation and deal structure but this does occur on occasion, especially in the event of a deal syndicated across Angel groups. Concerns can, and frequently do, arise when the company has secured monies at unreasonably high valuations along with untenable deal structure terms from lone Angels.


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Seven Key Ques ons to Screen Investment Opportuni es for ... · Earlier-stage ˚rms with clear protectable intellectual property are of interest but ideally companies should be in