How Top Angel Investors find The Perfect Fit

Whether you are an angel investor or an entrepreneur looking for early stage funding, here are excellent insights from Greylock’s Reid Hoffman, founder of LinkedIn, who led a knowledge event last week presented by AngelPool.    He is a founding director of PayPal, a founding director/investor in Zynga, first round investor with Peter Thiel in Facebook, as well as many other hits.
Hoffman seeks strong returns and “the creation of new things.” The investment cycle is 5-9 yrs., with a small number of companies in the portfolio driving the returns.  
He offers three key criteria for successful angel investing:   
The Network
Hoffman does not invest as an individual.  He qualifies and invests via his network, critical from two standpoints — mitigating investor risk and maximizing the value added to the company.  There is a Been There/Done That religion in Silicon Valley — sticking with your track record and core competencies in order to leverage the deep experience and relationship base.  
Where do you fit in the ranking of other investors who would most help the company?  Best to invest when you are the strongest relative to other investors in the competitive space.  There is a high mortality rate of portfolio companies and many things that can go wrong. The network delivers a shared intelligence and shared work level. Very important in due diligence and reference checking. 
It is also important to ensure the perpetuity and effectiveness of your network.  Are you giving back and constantly adding value?   This would include counsel and constructive feedback to entrepreneurs in whom you don’t invest, as they can be sources of future deal flow.
Competitive edge  
As an investor, you can’t learn it.  It draws on your cumulative experience + network, so that you can immediately know the key variables in a potential investment and be able to assess that in a 5 minute conversation. You need to have the DNA and knowledge of the complete spectrum.  Hoffman’s space is, of course, Consumer Internet.
If you invest outside of your edge, it can be for purposes of learning, but do not expect a payback.  Write it as a zero on your books. 
You should invest in companies that you could lead yourself.  Ask yourself, how would you do the play as CEO?  Where is the best location to do that company (i.e., industry infrastructure)?  
Company’s ability to get next round of funding
When Hoffman looks at a company, he envisions what the next deck looks like.  
What will change in the next 6-12 months in terms of new products, marketing results, etc.  How will it set up to be VC-funded? How can you help?  
It’s important to ask the hard questions of the leadership team.  Test the key hypotheses.  What are the key risks you see?  What are you obsessing about?  Issues must be identified.  If not, the entrepreneur is either dumb or deceptive, says Hoffman. 
You are looking for a collaborative, not confrontational approach.  Here are issues we see.  Here’s how we will solve the problem.  Here’s how we would hope to work together. 
As a potential angel, you should see congruity in how you would handle it if you were running the company.  In weighing two similar companies, evaluate which is more adaptive than the other.
I participated in the forum on behalf of our Texas Women Ventures Fund.  (NOTE:  TWV is a mezzanine fund that invests in women-led businesses.  Currently, there is not an early-stage/angel focus, although some of the investors participate in the angel sector as individuals or institutions.) 
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Copyright © 2012 Nancy Keene