March 8, 2021
In "Angel Investing Tips"
Whether you’re a seasoned angel investor or a newbie, angel investing in hard-science and technology companies may be challenging. One of our initiatives at Propel(x) is to provide tools and resources for potential angel investors. We created a 5-part guide to give an overview of some basics so you may start evaluating and potentially investing in startups with confidence. One of the first things to realize is that investing in startups may be very risky and can result in the loss of capital, so it’s important to be diligent when entering this arena.
Our first resource The Basics: The Dos and Don’ts of Investing in Science and Tech Companies starts with a few things to keep in mind when you begin to look at startup ventures.
When it comes down to it, it’s important to ask industry experts questions about science and tech startups to fully understand their technical feasibility and market risk. Investors with access to objective and well-informed answers to their questions may have an advantage when making investment decisions. That’s why the Propel(x) platform has built-in functionality to connect investors with experts to get their questions answered.
Make sure you have a grasp of the technology, the management team and the market. In your initial evaluation some of the things you should assess may include the following:
1.) Who is the management team? Make sure you are familiar with the people running the company. What are their backgrounds? Communicate directly with them. Talk to others who may know them. The best ideas only see the light of day when they are shepherded by a strong leadership team.
Expert Tip | Focus on the founding team. David Pakman, a partner at Venrock, says: “We spend the most amount of time thinking about the founders and the early team before investing.” Like other VCs, David recognizes that the driving force behind innovation is great entrepreneurial leadership. Source – https://www.propelx.com/evaluate-startup-founders-invest/
2.) Is there a market for the product: Is this something that people would spend money on? How big is that market?
Expert Tip | Evaluate startups from both a business and scientific perspective. Roz Potter, a biomedical principles consultant, explains “neither business intelligence nor scientific intelligence should operate separately or one in favor of the other.” Investors must question both the innovation’s “potential valuation” and whether it will “really do this…How do you invest in something, even though it has the potential for a billion dollars, if you don’t know if it’s going to work or not?” source – https://www.propelx.com/biopharma-investment-tips-industry-expert/
3.) Competition: What does the playing field look like? You want the field to be tilted in favor of your possible investment. Less competition is better.
Expert Tip | Realize competitors exist. Ensure the startup team has planned for strategic partnerships to increase their chances of success. As a serial entrepreneur and seasoned investment advisor, Jason Holt believes, “If all of the other upfront items check out, you do eventually get to examining the technology, its differentiation as well as the strength of the intellectual property position. One thing I’ve come to realize, however, is that you often find companies with virtually identical technology, or identical enough as far as the marketplace is concerned, and the difference in the success of company A versus company B comes down to things like a novel business model or a strategic partnership that blocks a competitor from gaining access to the market. Business execution can often trump technology – something that took me a while to wrap my head around.” source – https://www.propelx.com/jason-holt-interview/
Choosing where to invest can be tricky and nerve-wracking. While going with the crowd may be a common way to play it comfortable, and indeed possibly result as a good angel investing decision, it shouldn’t necessarily be a strategy, and is definitely not a guaranteed go-to. In our study Unfollow the Leader, we found that contrary to popular belief, lots of Angel investors are choosing where to invest based on companies and management teams that they can connect with and innovations and technologies they deem as being potentially world-changing, instead of scoping out what hot technology is getting all the focus. Sometimes it’s worth exploring what companies and technologies mean to you and seeking what kind of innovative concepts you can discover that aren’t what everyone is talking about in the moment.
In the digital age, playing the waiting game is akin to a lost art. When you invest in a science and technology startup, you are truly investing in the future, and the timelines for these companies tend to be longer than the usual messaging or food delivery apps due to regulatory barriers, niche market risk, etc. But patience is a virtue for a reason, when investing in companies that have the potential to have a global impact. In our blog post A Comparison You Weren’t Expecting: Angel Investing and Pokemon Go, one of the points to note was Patience. “In Pokemon Go, trainers search for creatures from their incubation period to when they’re fully formed and thriving. Similarly, Angels invest in startups at all different stages. They may invest at the beginning, nurturing the young business through its first years towards the market, or find a business later after they’ve developed a solid foundation and gained capital.” When looking at science and technology startups to invest in, educate yourself on reasonable expectations for your investment.
For more Do’s and Don’ts when looking to invest in Science and Tech companies, check out the complete Part 1 of our Our 5-Part Guide to Angel Investing.