Angels should have the same depth of understanding of the markets they invest in as the people who are working in the field, with fiduciary responsibilities to the people whose money they are investing. Angels have a broader set of reasons for investing, too: Maybe they want to help a friend out, or they care about a particular problem, or perhaps — as is sometimes the case — they are looking for an infinite pit to pour a not insignificant amount of money into without any chance of success at all.
Investing at the earliest stages of a company is a high-risk activity, even with perfect information and context. That means that investors are more likely to not make any returns than someone investing in a more established business.
I can’t tell you where to invest, and I can’t predict which startups will go on to be unicorns. But by avoiding the following pitfalls, you have a better chance to succeed.
Overvaluing the idea: Angel investors are often enamored by a groundbreaking idea and assume it will surely lead to success. The problem is that any group of vaguely entrepreneurial folks can brainstorm a million great ideas in 20 minutes. Execution trumps the idea; remember that you’re investing not in the idea, but in whether you think someone can execute it.
Underestimating the importance of the team: A strong, cohesive team with a proven track record is one of the most valuable assets a startup can have, and founder/market fit is one of the most important aspects of early-stage investing. Even if you love the idea, look at the team: Does it have a chance of success? Can you think of any other founder who has a better chance of success? If you can think of a better founder for this particular idea, pass on this round.
Worrying about valuation: At the stage you are investing, valuations are essentially meaningless. If you can get in on the round with a discounted convertible note of some sort, that’s usually good enough. Capped is fine, uncapped works, too, as long as you get a discount for being an early investor.
Glance at the market size: A fantastic product in a tiny market might not offer significant returns. It’s essential to evaluate the total addressable market (TAM) and determine if there’s enough potential for growth. If you don’t, the next round of investors will, and the company will stall out at that point, unable to show itself to be investable at venture scale.
Falling for hype: In the age of unicorns and rapid tech advancements, it’s easy to get swept up in the excitement of a new trend or technology. If you invested in blockchain startups a few years ago, chatbots before that, viral social apps before that, and various ways of adding filters to photos when smartphones first came out before that again, and if you’re currently looking to invest in an AI startup, chances are you’ve bet on the wrong horse a lot of the time. The hot new thing does have winners, but it also has extreme noise-to-signal.
Trust your own expertise: If you have expertise, focus on that and invest in your own space. You’re much less likely to get tempted by the shiny new thing.
Misjudging product-market fit: Just because a product seems innovative doesn’t mean the market is ready or even interested. If you’re not sure (and why would you be, the company may not even have a product yet), ask around. Does the product or service genuinely address a market need? If not, walk away.
Overlooking scalability: A startup might have a solid business model for its current size, but can it scale? Without a plan for scalability and reasonable unit economics, it’s a losing game once it hits growth. Of course, it’s possible to figure that out later, but it sure ain’t easy.
Common sense is uncommon, but view your potential investments through the lens of the above list and add a dash of common sense anyway; you’ll be significantly better positioned to see some investor success than the vast majority of your peers.