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Stick Close to Your Area of Expertise
Do you know what the key success factors and milestones are for a medical device startup? How about a messaging app targeted at teens? Do you know how long it takes to sell an enterprise software solution to Fortune 500 company CIOs? You will be a more effective investor if you understand the market and/or technology that is the focus of the startup.
importantIn 2011, Rob Wiltbank of the Angel Resource Institute completed a study of angel investments made by members of angel groups.* He found that angels had a 60% better return on their investment when they invested within their area of expertise. So stick to your knitting!
Why? If you have had a career in enterprise software sales, you will understand intuitively the challenges in selling in that market. You’ll know how potential customers evaluate solutions, allocate budget, calculate ROI, what their risk tolerance is, who the influencers are, how long the sales cycle takes, what supporting proof is required, what marketing techniques are effective, and so on. You will have colleagues and friends in the industry that you can contact to litmus test some of the assumptions being used by the startup you are considering. You will be in a much better position to evaluate an idea, scrutinize the team, gut check the financials and perform effective due diligence if you are looking at companies in an area you know something about.
If you do decide to evaluate companies in areas outside your expertise, it makes sense to do so with the support of an angel group or someone in your network who does know the industry well. You can lean on the knowledge of other angel investors, but it will always be easier if you yourself know—or are at least willing to learn—what questions need to be asked and can converse with a founder intelligently.