Locating Quality Deals - 02/28/2008

In late 2007, I joined a new angel investment group. The group is made of successful local businessmen and business owners. At 41, I am at least 10 years younger than anyone else in the group, in some cases at least 20. I guess I should feel good about that. All of us are new to early stage/angel investing. After 6 months of looking at deals, and looking at about 12 opportunities, we have taken up due diligence on just one. And after over 2 months of looking at this one in detail, at the moment, it is not looking too good. So clearly, finding good deals is going to be the biggest challenge. Or at least the first, biggest challenge.

As someone who has spent the majority of my career in the software space, the last 15 years in commercial software and enterprise software, reading Business 2.0 and Fast Company and similar publications, I guess I had a vision of what angel investing would be like: Internet startups, consumer products, scientific breakthroughs, biotech, etc. Hmmm. Not exactly. Of about 12 deals we have seen, maybe 3 would fall into these categories.

One of those was actually the first company we looked at. This one was in the Internet e-commerce space - an online specialty retailer - so a good start. A detailed look at the plan showed that after 5 years in business, the company hoped to be doing 800k in revenues per year, with a 5% margin. That would most likely value the company at <1M after 5 years. This is not really an investment opportunity. Angel investors need to invest in opportunities that have 5x-10x (or more) return potential, to compensate for the high risk of deals overall, and the large time expenditure involved in this type of investing. I passed on this one - in reality, it seemed more like a good home business opportunity for the founding husband and wife.

We were close to investing in another company, this one having figured out something that was most likely very disruptive to an established market. There was a lot of science involved, and after over 2 months of good diligence, were still struggling to find the right external “expert” to provide an opinion. Finally, I found someone, who was willing to do it and highly qualified. Unfortunately, a few days later, the company told us they hit a “snag.” The results they published, and the demos we saw, actually were not valid.

It’s easy to get caught up in the excitement of something new and groundbreaking, even if you don’t fully understand it. Maybe that is why many successful angel investors talk about their Rule #1: Invest In What You Know. As a new investor, I would like to apply that rule. I just wonder when I will see deals in the areas that I “know.” In the meantime, I will apply Rule #2: When You Break Rule #1, Make Sure To Bring In An Expert. And even then, take your chances.

Early Stage Investment Blog: Open for Business - 02/24/2008

Welcome to the Early Stage Investment Blog. As a new early stage investor, over the coming months and years, I will chronicle my adventures seeking and making angel investments, and occasionally discuss other private equity investment areas. My company, First Ascent Ventures, LLC, is the entity I created to make private equity investments. I am […]

[ Home ] [ Contact Us ] [Blog] [ FAQ ]