Angel Investments: It's the "Who," Not the "What"

A common refrain in the investor community these days is, “I invest based on the jockey, not the horse.”  Many investors invest based on their confidence in the management team over whether or not they think an idea is good.

But what does that mean?  What about the founders do they look for in determining whether or not to invest?  Does the idea have any merit?

To get some answers, I went out and talked to some angel investors to get their insight, and here are the top things they look for when scrutinizing a team for investment:

1)  Can they execute?
The idea, of course, matters.  But not that much.  Angels we talked to mentioned that in their experience, startups rarely have the idea nailed perfectly from the get go.  The business model might not be the best option; the pricing may be off; the team might need some additional support, etc.  For many angels, none of these are deal killers.

What angels look for is whether or not the team can execute.  It is very rare to see a startup that has all of the answers and has a perfect business model.  Investors want to know that the team is aware of this, and they want to be confident that the team will figure it out.  They know the idea may not be perfect, but they are also assured by the team that changes will be made and that the team is bright enough to figure out and execute the right model, the right pricing, the right staffing requirements.

Which brings us to number two.

2)  Are they flexible?  Do they check their egos at the door?
Knowing that it is rare that a startup has everything figured out day one, investors want to know that the team is open to change.  If an entrepreneur is so sold on their model being right that they are unwilling to make a change no matter what, investors will likely take a pass.

Investors have told me stories of entrepreneurs that they have met who think they have all of the answers.  They are “certain” that their idea will work and that they do not need to talk to customers for feedback or to take a mentor’s good advice, no matter how much it will improve their chances.  Their egos caused them to make two major mistakes when they could have taken very simple steps to avoid them.

An entrepreneur cannot execute the right model if they are not willing to shift away from the wrong one.  

3)  Do they have passion?
There are thousands of smart entrepreneurs out there that can build a great product or service.  But getting a product off the ground, no matter how good, is a long, difficult and stressful process.  If that smart person does not have the passion for the problem their product or service solves, they are likely to give up and move on to the next big idea – after they have spent all of your money.

Passion is important because you want to know that no matter what, the entrepreneur is going to find a way to make this product successful.  They care too much about it to see it fail.  If the entrepreneur is just another smart person with another good idea, they might head for greener pastures at the first sign of trouble.  The ideas are the easy part; the execution is the hard part.  And it takes passion to execute.  

In summary, the business model does not have to be perfect to make a good investment.  At the early stage, the idea is rarely perfect; you are really investing in the ability of the entrepreneur to figure out a way to make it work.  Are they stuck on a bad model and unwilling to change direction?  Pass.  Are they open minded, willing to try new ideas, and do they have the passion and ability to execute those ideas?  Invest.