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How can you tell if an angel investor is “real” or “fake”?

, July 13, 2015, 0 Comments

It has become quite fashionable to be an angel investor. The last 5 years has seen an increase in the number of registered angel investors on various platforms – from a mere 3000, we are at over 25K in the US alone. That begs the question – do we have more people who have become angel investors now, or are people richer, or did we always have them and we just found out about them now?

start-ups-guide-angel-investor-marketexpressMany high net worth individuals would like to be angel investors, but just don’t have the inclination to do the heavy lifting that it requires to help entrepreneurs, source deals and find follow on investing. Most are also fairly conservative, especially if they have made money at a larger company and not been an entrepreneur before.

Here are key “leading indicator” questions that I ask before I try and syndicate deals with other angel investors, which might be useful for you to consider. YMMV.

  1. Have they invested before in a startup? The best indicator of an investor is if they have invested before. The time to make the first investment for a newly minted rich individual is close to 21 months. So, if in your discussions with a potential investor, they have never invested before, it is highly unlikely they will. Angel list is a good source, but not comprehensive. I would simply ask them this question. Or ask them for their previous investments? What companies have they invested in before?
  2. Do they come referred as an investor? The best network is still word-of-mouth. They best referrals for angel investors is typically not other investors, but entrepreneurs is what I have noticed. Even if an investor “passes” on an entrepreneur’s idea, I have found that if they have been respectful, consistent and fast in their communication, the entrepreneur will refer “relevant” deals to them.
  3. Are they accredited? When an investor has over $1 Million in investment capital (exclude the capital in their primary residence), or if they can show they have over $250K in annual income, they can be accredited. I have found the best way to determine this is ask the investor for who their financial consultant or tax consultant is. People who have that much money have a person for both or either. If they don’t, the signal I get is they are rather unsophisticated in their approach to investing.
  4. Are they involved and connected with the local startup ecosystem? Most interested angel investors are either mentors or advisers at local entrepreneur’s hot spots such as accelerators or co-working spaces. If they are not connected, it is likely they are not going to invest, since they don’t value the experience.
  5. Do they understand key terms and nuances? An experienced or willing angel investor understand convertible notes, equity rounds, key milestones and other “insider” terms well enough to not have you explain it to them. If you are educating the investor about angel investing, you are better of looking for someone else to do that, while you focus on your company.

What other questions would you use to differentiate between a “real” and “wannabe” investor?