Start-ups create employment and are an important source of innovation in our society, and when they are successful, they can be very profitable for their investors. For these reasons, angel investors and venture capitalists look for promising start-ups to fund, but since the rate of failure among start-ups is extremely high, investors must carefully screen the thousands of projects that approach them for money. The difficulty is finding a way to tell if a start-up company will succeed or fail. Unfortunately, there is no magic formula or definite set of criteria that can be easily applied, as what works for one start-up operation may not work for another, and some successful start-ups seem to owe their success entirely to luck. While there is no set answer to this dilemma, there are some general guidelines that a prudent business angel can apply that will help guide their investment decisions.
An obvious area to look at if you are considering investing in a start-up company is their business idea. Is it a good one? Is it innovative or does it offer a different take on what's already out there? Does it have potential and will it work in the real world? You may or may not feel comfortable putting your money out on a limb to support a radically new idea that has yet to be proven in the real world. This really depends on the level of risk you are prepared to take and your own motivations for being an angel investor.
Business Strategy and Management Team
Having a sound, thoroughly researched business strategy can make or break any business and is especially true for companies just starting out. Do they even have a business strategy? They should if they are approaching you for money! Also, look at the management team leading the start-up. Do you have confidence in their drive, determination and ability to follow through with their plans? The human element is fundamental to the success of any endeavour; no matter how brilliant the idea and how sound the plan. If you don't get the sense that the people behind the start up are the right people to get it done, you may be better to hold onto your money.
Market Size and Competition
Consider the potential market for the product or service that the start-up company wants to offer: is it a specialised niche market? Is the target market already saturated with similar products or services? What edge does the start-up company have that will distinguish them from their competitors? Are there already well-established businesses in that market which the start-up will have to contend against for market share? Trading common sense for good intentions can be disastrous, for you and the start-up, so insist on due diligence before you will even consider investing in a project.
Lastly, what will be the social impact of the start-up? This may or may not concern you, but most angel investors consider more than just the bottom line when buying shares in a start-up. So if you want to make a difference in the world through strategic investments, ask yourself if the start-up will be making the difference that you want to see in the world. Sometimes, doing the right thing can also make you a lot of money.