By Rafe Furst, Crowdfunder Co-Founder
I recently published a comprehensive guide for entrepreneurs called Hacking the Startup Fundraising Matrix. This is based on my 20 years of experience as a fundraising entrepreneur and as an angel investor myself. Here I’m going to share my favorite hacks for evaluating a deal as an angel investor*.
#5 Percent of Fundraising Goal Remaining
Do other people like the company and the deal terms? Can the company set and achieve goals? Will the company have enough capital to operate for the next phase of their life? These are all things you can learn at a glance by seeing how close to 100% they are on their fundraising goal.
Be careful to not let the round get away from you without at least making a reservation. It is easy for a deal to get hot and close quickly so don’t make the mistake of taking too long to invest.
Quick Tip: Crowdfunder lets you sort deals by Percent Raised.
#4 Valuation Relative to Upside
I have a different view than most angel investors and early stage VCs on this one. Rather than focus on stage or growth metrics and try to optimize for getting in at a “good” valuation, I focus on my upside as an angel investor.
I ask myself whether it is possible to get 1,000 times return on my investment given the valuation I am being asked to invest at. Thus if the current valuation is $5 Million then I need to believe the company could exit at $5 Billion or more. If the deal is a convertible note or SAFE then assume the valuation is the cap.
Generally speaking, VCs and professional angel investors will be looking for seed rounds valued pre-money at $6 Million or less and Series A at $12 Million or less. Which means that many of them pass on the ones that go on to the biggest exits. Famously, many passed on AirBnB early on, including at least one who could not see how big the potential was.
Quick Tip: Look for businesses with network effects on user/customer acquisition.
#3 Simple, Clear, Compelling Online Pitch
If their investor pitch on Crowdfunder isn’t simple, clear and compelling, how do you expect the company to attract customers, employees and angel investors?
Quick Tip: If you are not hooked in 60 seconds to learn more, pass.
#2 Lead Investor Quality
Crowdfunder made 50 investments in the last half of 2015, with a target of 300 in 2016, and 1,000 more in 2017… all without doing any direct diligence or negotiating terms. Our secret is that we believe in the power of our crowd, which includes some of the top VCs and angel investors in the world. We wait for them to do the heavy lifting and then we follow on at their same terms. Then we bring these same deals to you on Crowdfunder.
While the data shows that Andreessen Horowitz and Sequoia are no better than you or I at picking winners at the seed stage, they are better at diligence, negotiation, and most importantly business connections and later stage funding support. Thus, we know that any deal they bring us is not only worth funding, but they’ve also negotiated the best terms possible. Just make sure you are getting the same terms as the lead VC or angel investor, or if not, that you are comfortable with the differences.
Quick Tip: Use Crunchbase to see what other deals the lead investor has done. If you are envious, that’s a great sign.
#1 Founders Focus on Fundraising Process
Ready for a shocker? You can forget every other hack and just concentrate on this one and you will do just as well as the professional investors. You’ve heard before to bet on the team, not the idea. And how founders go about fundraising is a fantastic indicator of how they go about the rest of the business.
The ability to raise capital from angel investors and VCs, especially at the early stages, is a sign that the team can solve hard problems and execute on achieving goals. According to Bill Gross the ability of the team to execute is second only to timing in terms of startup success. Plus the more efficiently an early stage company can raise from angel investors and VCs, the longer runway they have, which is important in making sure the company doesn’t fail before the market conditions are ripe. In other words, fundraising skill solves for timing as well.
As I pointed out in Startup Fundraising Matrix, there is a reliable process for raising capital and all it really requires is discipline in following a process, plus grit. We’ve seen founders without any sort of lead investor raise over a million dollars in two months, and we’ve seen founders with top VCs and angel investors that are cash flow positive raise zero investment.
Many founders treat fundraising as an afterthought, rather than an integral part of their business. This is a huge mistake and a sign of poor executive leadership. To make a startup successful, there will never be a time that a founder isn’t either actively raising, or preparing for their next round. The best founders make fundraising look effortless and actually have a good time doing it. They understand that the passion and communication skills they bring to the fundraising process are what they need to sell the product, create strategic partnerships, and recruit top talent.
Quick Tip: Ask the CEO to tell you their detailed process and timing for closing the round. If you don’t like the answer, don’t invest.
If you haven’t already, be sure to self verify your investor status to get access to trending Deals on Crowdfunder. Once verified, be sure to connect with other investors and entrepreneurs within our network to get notified of all the activity.
*I am not suggesting you shouldn’t do your own proper diligence, you should. Also, as a final piece of your diligence, here’s a cognitive hack I use to make sure I am protected. Before I invest, I imagine that six months from now the founder comes to me and says, despite everyone’s best efforts the company is out of business and I can write off my investment as a total loss. If I imagine losing any amount of sleep over this, then I don’t invest. This keeps me from investing too much into any one deal, and it reminds me that statistically any one early-stage investment is likely to return nothing.