Here are some basics to keep in mind when investing in early stage companies.
1. Don’t invest if you can’t afford it. Angel investing is a high-risk, high-reward game. You must be able to financially with stand and be prepared to lose 100% of your money.
2. Don’t invest in lifestyle companies. Lifestyle companies are service companies, i.e. law firms, local deli. These businesses have limited scalability. The high-risk, high-return game only works if the company is scalable and could return high multiples of your money. You will never get an exit or IPO out of a local restaurant.
3. Don’t put all your eggs in one basket. Angel investing is so risky that you have to diversify risk by making a number of investments.
4. Don’t invest if you don’t believe in the team. The biggest factor in early stage investing. Good ideas are commodities – a dollar a dozen. Invest in A teams with B ideas and B teams with A ideas. The ideas can always change, but it’s the best team that perseveres and executes that will succeed.
5. Don’t be overly optimistic. Be skeptical of everything a founder tells you. It’s their job to infect you with their passion and make you excited about their startup. It’s up to you to dig in deep and do your homework (due diligence) and find out whether they’re the real deal or not.