So You Want to Be an Angel Investor? Not So Fast!

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In a recent New York Times "Your Money" article entitled "Tips for the Aspiring Angel Investor," Paul Sullivan discusses the pros and cons of angel investing. As observed by Sullivan:

• "[T]oo often, investors are not doing their due diligence."
• "Considering the pitfalls is one way of minimizing them."
• "Picking from just a few may be convenient, but it is not rational."
• "Angel investment groups are popular."
• "Another option is to find investments where you can use your knowledge as well as your capital."
• "Who is managing the company is as important, if not more important, than the idea itself."

Sullivan also cites the following recommendations of others:

• Avoid "managers enmeshed in complicated family dynamics" or who have "lost the drive to grow the company so it would benefit investors."
• Look "at the expertise of the board members and how they [function] together."
• "The company’s prospects are also helped, he said, if there are some barriers to competition, either in terms of the technology or the relationships the company has built with crucial vendors."
• "[G]auge the time it will take for the company to bring the idea to fruition."
• Ascertain that "there is a limit on how much [your] investment can be diluted."

This is all very valuable advice, but I invest in start-ups somewhat differently. I have yet to experience a failed angel investment, yet on the other hand, I am extremely selective concerning the start-ups in which I am willing to become involved. I would take no pleasure in knowing that some of my investments succeeded, thus covering the losses of those that failed.

Moreover, I only invest in life sciences, because this is what I "know" and enjoy.

And although my batting average is currently perfect, this does not mean that all of these companies, relying upon cutting-edge technologies, will ultimately succeed in taking their products - drugs and medical devices - to the marketplace. Or stated otherwise, there can be enormous growth in corporate valuation over the years, but this can also be wiped out in the blink of an eye by the emergence of a better mousetrap or clinical failure.

My own rules, in addition to much of what appears above, are not offered as advice inasmuch as they are only applicable to me (each of us is different in terms of background, goals, resources and risk appetite) and not to others:

• I take into account that angel investments are not liquid. If I need the money back short-term or medium-term, this is not the place to park cash. Even if the idea can quickly be brought to fruition, this does not necessarily mean that there will be any return on investment.
• I determine whether the start-up will be seeking a buy-out or if it plans to operate independently over the long haul. Does it want to go public? Is all this in keeping with my personal desires?
• I try to talk with the attorney responsible for the company's IP in order to examine the strength of any relevant patents or patent applications.
• I seek to assess competitive technologies.
• I will not invest in companies if I don't trust management. In fact, I will not invest in companies if I don't like management. My belief is that angel investment demands hands-on involvement and monitoring, and this requires rapport with management.
• I ask for a position on the board of directors or at least an advisory position to influence the company's direction and, if possible, to avoid dilution.

Angel investment groups? Not a chance. This is not a hobby for me. Rather, it's a way of life.