'The jockey' key for angel investing, veteran Canadian investor says
Investing in high-growth companies is like a long horse race and understanding the jockey you're betting on is key for angel investors, veteran Canadian angel investor Ross Finlay says.
Mr Finlay, co-founder and director of the First Angel Network Association in Atlantic Canada, is one of the international speakers at the annual Angel Summit in New Zealand in Napier.
He said before angels commit their money they have to pick the right jockey and the earlier stage the company is, the more that matters.
One of the key things to look out for is "coachability," he says.
"You need to know if they will listen to advice experienced business people are offering to give them," he said. "You also want them to be passionate without being weird about it and you want them to be smart enough to understand they don't know everything."
Typically, entrepreneurs spend a significant amount of time developing a new product or service they think they know everything about. "But often they don't understand the market for that product or service well enough or the investment environment they're trying to succeed in well enough," Mr Finlay said.
He said 80% of problems angel investors experience in investments come from the 20% that have the wrong jockeys on the horse.
The worst investment experience he's had was with an entrepreneur of a Canadian software company that did music education. Finlay disliked the founder at their first meeting when he came seeking investment and told him he needed to fix his business model and improve the management team (which consisted of just the founder) before he could hope to get angel money.
The entrepreneur returned in six months and had greatly improved the business model but didn't have a team around him. Six months later he came back with a dream team in place and Finlay said he then thought "hey we'll give you a shot" and the angel network invested $C500,000 into the startup.
Within a week nearly every one of the dream management team had left, saying they couldn't work with the founder and the investment turned out to be a dud. "I had a gut feeling that comes with experience" that I should have listened to, Finlay said.
Angel investors can mitigate against their risk on the jockey by making sure they had a good dialogue with them pre-investment to ensure alignment – somewhere between 40 and 80 hours for one company to allow you to figure out its culture, he said.
Listen to how the entrepreneur answers questions, how quickly they provide any information that has been asked for, and whether they're open to building a relationship with you, he said.
"You're going to be business partners with this partner, so you have to ascertain if they will be a good partner."
Mr Finlay said he doesn't have a preference between single or co-founders but says one of the co-founders tends to be an "alpha wolf that assembles the pack."
Often angel investors only have a relationship with the dominant one which can be risky if the relationship between the co-founders fails, he said.
Finlay asked what all these companies have in common: Twitter, Paypal, Groupon, Starbucks, Nokia, Flickr, HP, Nintendo, Instagram, Wrigley, Avon and Pinterest?
They have all pivoted on their original business idea, Finlay said, and the best entrepreneurs are open to admitting their first idea may not have been a good one and finding a new direction that could work given how fast things now change.
"However, in my experience the only people in this world that like change are babies in diapers," he said. "If they have angel investors willing to do that they should be grateful because it is a difficult process."