Thanks to the benefit of hindsight, I often see red flags and signals about a startup after I’ve made my initial investment. These help me decide whether or not I’m going to follow on in future rounds.

Dg

The product is the most important signal that it’s a good investment

To me, an important signal that a startup has potential is how a founder evolves their product. They need to test and evolve their product with actual customers. So a commitment to continuously testing and improving their product based on feedback from real customers is a good signal.

Another important signal that the founders know what they’re doing is how much early traction the product has in the market. Founders learn a lot when they sell and service their own product. If they’re learning about why their product sells and why it doesn’t, executing well and gaining traction in the market then I’ll generally be interested in following on.

Getting to know the founders can raise red flags

Being an angel investor gives you the opportunity to get to know the founders, understand how they operate a business and see how they interact with other shareholders. This can raise some red flags which may affect my decision to follow on.

Some instances where I haven’t followed on have been because the founders didn't communicate with their shareholders regularly. A shareholder is risking their money so they want to know how the business is going. When founders engage with their investors regularly then nothing is a surprise - especially when they need more money 12 months later.

a commitment to continuously testing and improving their product based on feedback from real customers is a good signal.

Another reason I may not follow on is if the founders ignore my advice in an area where I have a reasonable level of expertise - that’s not an impressive strategy. In that instance, I may just choose to step back and let my investment ride.

How the founders run their board can be either a red flag or a signal that they know what they’re doing. An early stage business doesn’t need monthly meetings or a big board that knows how to scale - it needs the founders and perhaps a couple of other people who can get the ball rolling. If the founders have people on their board who are invested in the success of their business, can give honest feedback and understand about corporate governance then it’s a good signal. It means they’re thinking about how their business looks to an external party. On the other hand, if the board is stacked with the founder’s mates than that’s a big red flag.

Whether or not other investors choose to follow on can be both a signal and a red flag. If other investors aren't following on that can have pretty dire consequences for the business and the ability to attract new capital, so I’ll always take that into account.

Before making my decision whether to follow on or not, I look for these signals and red flags. If I see my initial investment is going well, the company is getting traction in the market and the founding team operates well, I’m generally happy to follow on.

Danny Gorog is an Angel Investor.

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