Here are three key pointers for investors who are funding startups.
The team is the most important part of a startup. Diligence should focus first on the team, not the product, space, or anything else.
Monitor the startup for three months before investing to gauge momentum and traction. You need to peel back enough layers of the onion to know what’s there. Ask lots of questions — your mantra should be ‘let’s peel the onion.’
The biggest challenge in angel investing is not that the startup goes under but that it turns into a lifestyle business. Historical returns indicate that 10% of your investments will be home runs, 15% will be singles/doubles, 10% will go out of business, and 65% will turn into a lifestyle business.
To avoid your investment turning into a lifestyle business, ask for a redemption right at investor sole discretion. If they go on the payroll exit, you can exit with the redemption right.
The Payroll exit, is when a startup gives up trying to make a go at a venture exit and decides to sit back and just take above market salaries for their exit. This leaves the investor on the equity exit with no clear path for a return.
Thank you for joining us for the Startup Espresso where we help startups and investors connect for funding.
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Copyright (c) 2020, Hall Martin and investorconnect.org. All rights reserved.
Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.