Management Team

Published on March 30, 2016

By David M. Freedman and Matthew R. Nutting

The most important trait of being a successful angel investor is: good judge of character and talent.

When you invest in a company that has a limited track record in terms of revenue or product distribution, you need to judge whether the founder (or founding team) has what it takes to succeed. Experienced angel investors commonly “bet on the jockey, not the horse.” For example, founders who have been involved in startups in the past—especially those whose startups have succeeded—are more likely to succeed in the future than founders with no startup experience.

Even if they do have what it takes, it’s still a long way to market penetration and profit, but the talent and commitment of the founders underlie all the other variables of success. You need to be able to judge whether the founders and executives are honest, talented, reliable, durable, and committed to making customers and investors (and regulators, in some cases) happy. Fortunately, the equity crowdfunding regulations require owners and key employees to fully disclose information about their backgrounds.

We used the word “talent” twice already. How can you evaluate it? Ray Smilor, president of Beyster Institute for Entrepreneurial Employee Ownership, at the University of California in San Diego, says this about it: “In the business plan, I’ll look for evidence like previous success in other ventures or projects, credentials in their areas of expertise, ownership of intellectual property, and knowledge of the industry in which they want to compete.”

Good founders, according to Y Combinator founder Paul Graham, are “relentlessly resourceful.” They “make things happen . . . but not always in a pre-defined way.” They have a “healthy respect for reality” and adapt to circumstances, sometimes pivoting into new directions. They “do not get discouraged and give up.”

Graham’s view is echoed by legendary angel investor Ron Conway: The business idea might change—in fact, it will change—but “the people are the foundation of the company.” We provide more guidance on researching and evaluating founders in Chapter 12 of our book, Equity Crowdfunding for Investors (Wiley & Sons, 2015).

In an  article that he wrote for, Smilor said he looks for at least one other clue besides talent, skin in the game:

It’s awfully easy to spend someone else’s money. Consequently, I look to see whether the entrepreneurs have invested any of their own money in the venture. Putting their own money into the business indicates a level of commitment that shows genuine seriousness in the venture. I see a lot of business plans today written by graduate students who want to start companies. Many indicate that they can’t put money into their venture because they don’t have any to put in. I always encourage them to find a way to put something into it. The amount of money is less important than the fact the entrepreneurs are willing to invest more in their venture than their own sweat equity.

About the authors
David M. Freedman has worked as a financial and legal journalist since 1978. Matthew R. Nutting practices corporate law with Coleman & Horowitt in Fresno, CA. Freedman and Nutting are coauthors of Equity Crowdfunding for Investors (Wiley & Sons, 2015).