Within the Angel Kings’ Investment Formula, we use the following as metrics before deciding to invest in PEOPLE:
· Organic net wealth vs. Age
· Family background
· Credit and Background check
Investors need to interview founders in order to trust but verify the credentials and people with whom they plan on investing. Your intuition is often the best marker for future success.
For example, someone who claimed to have generated more than $10,000,000 in revenue at a previous cybersecurity startup once pitched to us at Angel Kings. With such profound success in business development, we knew we might have a hit on our hands. However, after speaking with the previous CTO and CEO, we learned that the startup had dissolved after three years and that the company had hit no more than $750,000 in total revenue during that time frame. Be careful with integrity... Trust, but verify.
Investors need to determine how old a founder is and whether or not she has previously earned a living or made money independent of her family’s wealth. If a founder has made money by her mid–30s – read: had a liquidity event, IPO’d or sold a previous company – this should catch your eye. However, if a founder is saddled with debt or still struggling financially in her late 20s while using her parents’ money to pay her bills, stay away.
Most 20, 30 and 40–year–olds should have learned how to manage their money. But another indicator of success in startup founders is their exposure to affluent people, which may be because many founders come from wealthy families themselves. We believe that it is best to invest in founders who are comfortable having a conversation that deals with large amounts of money, but also do not support themselves using their families’ wealth. These startup founders tend to have wealthy parents who taught their kids how to invest but also how to live frugally. As an investor, having a founder who has been taught financial responsibility at a young age yields greater returns. This doesn’t mean Angel Kings doesn’t invest in some kid who’s only 19 years old and is building the next big thing... rather, we tend to ask enough about a founder’s background and nurturing to get a sense of how he or she handles money. After all, when we write a $1,000,000 check, this money should be neither overwhelming nor too little for a founder to understand how to manage it.
In fact, look no further than Zuckerberg and Gates. One’s father was a wealthy dentist and the other’s father ran a bank. Both kids went to private schools and then matriculated at Harvard University.
Why does exposure to money matter? Why are angel investments more successful when the founders come from a family with some means?
The basic reason is two–fold: On the one hand, you get someone who won’t spend freely without frugality (a big problem currently in startup investing), and on the other hand, the investors will get someone who’s not going to sell out on their first buy–out offer from a larger company.
Larry Page and Sergey Brin of Google exemplify the type of founder we’re talking about. They were offered $1,000,000 to sell Google to Yahoo. To most people, $1,000,000 is a lot of money. However, both Page and Brin had been among wealthy students at Stanford, and they both come from families who understand worth, value and how to spend money frugally but with calculated risk. As founders, their backgrounds gave them a far–sighted perspective on what Google would be worth down the road.