Here’s what I do:
As an active angel investor, I personally approach the investment decision from multiple perspectives before committing, unlike when I’m running a fund and have a larger pool of capital and a much longer time horizon.
Most importantly, when using my own money, I start with the questions of;
The return of capital and return on capital and is this company capable of becoming a billion-dollar business and is it going to change the world for the better?
(a good rule of thumb is, all startups must be at minimum capable of 3X exit of the value of the fund your approaching. Otherwise, the power laws and risk rewards are not there for the fund to take on that risk) This is where the Return The Fund (RTF) analysis first comes into play.” If you’re approaching $100M fund, then ask yourself can I reasonably achieve a $300M exit in my sector, and if so what metrics do I have to hit to make that happen?)
Then I ask myself these questions below.
a) What is the probability of getting my money back?
b) When I get my original investment back, what will most likely be the return? ( *Angel investors, you have to be very careful here at this initial stage with term sheet language and not invest in a company that gets acquired three years down the road as an “Auqi-hire” and the founders are made whole or receive a 1x return and the Angel investor only get’s their original investment back or even worse only partial investment returned due to the acquisition and signing bonus paid to the founders.) Make sure to add anti-dilution or liquidation preferences with a specific multiple required to exit.
c) Who will be funding the Series “A” round in the future? ( What VC firm’s – what partners fit this company best? (I want this startup already lined up for a Series “A” round before I commit the money) What are the hurdles we will need to clear to get funded? R&D, Tech, Sales, MRR’s, DAU’s, MAU’s or sequential quarterly growth?
d) Then I begin to inspect what I expect, and start making the calls to those VC firms and getting an indication of interest. Next, we outline the hurdles needed to not only get the meeting months from now but also a solid yes they are writing the check if we meet or exceed those targets.
e) I stay in touch with the VC partners updating them on a regular basis about significant events or traction we receive. I’m also very transparent and share with them the failures and what actions we took to correct the situation to get back on track. I share everything with my financial partners and take responsibility when we fall short and also let them know when we are crushing it!
f) We always have a clear “use of proceeds” for the capital we will be deploying, how it will scale the growth and sales of the company and what the ROI looks like using that capital, based on past performance numbers using customer acquisition cost and lifetime value of the customer data (” CAC-LTV “)… We don’t try and guess.
g) When we are finally ready, we schedule the meetings and do a deep dive with the VC partners in person. We feel we are able to make far more progress with VC’s or investors in a short period of time because we have developed so much rich history over the last few months… It’s almost like old friends catching up, instead of the typical cold hardcore interrogation process you might receive at some venture firms. We generally bs about what worked, what failed and what it took to get here and where we are going from here. We will usually do between 3-5 meetings that day on Sandhill and I will already have most of the deal syndication work complete, and then dovetail that into closing the round.
h) Pro Tip- I try to start meetings with the VC partner and venture firm that is the best fit and capable of taking the largest position of the round and then fill in the remaining capital until it is generally oversubscribed. This strategy has worked well about 39 of the 43 times we have done this.
Randy has extensive experience as a CTO and CEO of eight venture-backed technology companies including three software-publishing companies, two Internet technology companies, an e-commerce company and two celebrity-based digital media companies and published more than 30 consumer software applications that collectively have sold more than 20 million copies worldwide. He has raised more than $250 million in venture capital and returned more than $28 billion to investors. He has held C-Level positions at Adobe, Yahoo and the Home Shopping Network. http://randycadams.com/
Example;Marc, I am advising a company that has Nanotech that can save 2 million people a year from dying – we should discuss. Would you like an introduction?
He explains his role, what sector the company is in and what solution they provide. He doesn’t waste time going into how big a market it is, why they are better, whom they are already speaking with or any financials or any of the hard data yet. He simply asks the question, would you like an introduction? Randy is sharp, has a hustle and work ethic second to none and I strongly recommend him, if you need an intro just ask?
( If this is a VC’s sector and they like the idea and problem your solving, then they will respond and want to hear more from you. This is the fastest way to get your email read and responded too.)
Here is a recent article I came across the other day that speaks volumes about the one simple equation every VC knows.
Why your startup idea isn’t big enough for some VCs
“Venture Capital functions with a power law where the majority of a fund’s returns come from a small percentage of investments. Because of this, VCs need to know if a single investment can return the entire fund. As Bill Gurley famously said “Venture capital is not even a home run business. It’s a grand slam business.” This is where the Return The Fund (RTF) analysis comes into play.”
Definitely worth the read: https://medium.com/@mhdempsey/why-your-startup-idea-isnt-big-enough-for-some-vcs-2440b61f6d36#.nm260c7ik