Angel Investors

What Angel Investors Should Look For
By: John Lux



Article Summary: Contains tips for angel investors, such as accredited investors, investing in venture capital deals such as

startups ventures.

As an angel investor or venture capital investor, you are always looking for the next big investment. In our current

environment, as always, there are many deals looking for seed capital.

Most of us who qualify as accredited investors or qualified investors know, that most of these venture investments will fail.

How do you choose the next big angel investment?

Here are a few things to look for:

You want people who are totally dedicated to their business, not those who are trying to make a fast buck on the latest fad.

If they have the company logo secretly tattooed on their arm, they are for you. If they say things like “If this tech thing

doesn’t work, I can always go back to truck driving” then run! Your team must be willing to take those strong pains that are

the growing pains of a small business.

One thing that is always a turn off – the deal offered to the investor is one-sided. Let’s face it, in almost all startups

seeking seed money, the proposition boils down to “With our brains and your money, what have we got to lose?” The investors

should get a big enough piece of the company that if it wins, they win big, because most startups seeking see money will

fail.

Granted, deals that favor the investor de-motivate the entrepreneurial team and are also to be avoided. The company should

give the investors a chance to take over if the company fails. Most investors won’t want to, and even if they do, there is

likely to be nothing to salvage, but give them a prayer.

The company must offer a fair deal. I find that valuing companies seeking venture capital, particularly if they are startups,

is very hard. Only hindsight can tell you what the value is. However, it is easy to see that you should get an expert to tell

you what the investor expects.

Seed money investors are looking for character in management. There are several indicators of this. The first is a successful

track record.

The next is that the handling of investor funds is transparent. Inventory that cannot be verified does not exist.

Another sign of character is a scrupulous adherence to the securities laws. Anyone who invests in a deal where the principals

are ignorant of the regulations, are making unlawful sales of unregistered securities, and who are paying illegal finders’

fee and commissions to unlicensed securities “brokers” deserves everything they inevitably get. We know that the securities

laws are almost impossible to understand and comply with, but there must be a scrupulous effort. Companies who do not bother

to find expert securities help are probably not good investments.

As most startups fail, let’s take a look at why. Probably the largest cause of failure is management. While managers need a

living wage so they do not have to worry about their own finances while building their company, managers who pay themselves

lavish salaries and perks should be shot. Beware lavish spending of any kind. The watchword for a venture company is

frugality. Only the cheapskates will survive the hammer and pound of the business world.

Next, although this could be called incompetent management, having a faulty business model is probably the next most serious

cause of failure. Volumes can be written here, but the worst crime in this category is failing to do many customer surveys

and make them thorough.

Sadly, the next cause of failure is fraudulent conduct. Some “entrepreneurs” want to do nothing more than milk unsuspecting

investors. The worst of them lie to get the money. No matter how much due diligence you do, you may be up against

professional scam artists who make a career of doing this. As this is their career, they are good at it. Or you may be lulled

into a feeling of confidence by the stellar reputation of the promoters. It is at this point where the investor must be a

suspicious swine. As guilty as he may feel about it, it is his only hope.

The last risk is not that of failure. The risk is that of dilution. The company succeeds but the business is soaking up much

more cash than expected and the new stock that is sold dilutes your equity.

As all of us in this industry know, you will spend several times more than you expect and take twice as long as you expect to

do anything.

As many venture investors will tell you, the way to really do due diligence is to invest and be inside the company for a

year. Then you will really know what you have.

I believe that venture companies are our real hope for the future. They will fuel growth and competitiveness. I have a soft

spot for the brave entrepreneur who wants to sacrifice his life for his goals. Let’s give him the resources he needs to

succeed and do it fast. Then, a year or two from now, we can all look back on this as the start of a great deal for all

concerned. That is what we all want, isn’t it?

Article Source: http://www.upublish.info

About the Author:
John Lux
The author is a former OTC market maker, trader, attorney, security analysts and investment banker. He currently is a

principal in several venture companies and private equity funds. There is more for you at http://www.asklux.com or email me

at lux.investor @ gmail.com