Pinto perspectives on 'angel' investing

By : Jim Pinto,
San Diego, CA.
USA

"Angel" investors are private individuals who invest their own money as seed capital in early-stage companies that catch their interest, and help to accelerate them to market leadership. They are different from venture-capitalists, who invest professionally using funds from other sources.

Here is a summary of my own views and tastes as an angel investor.

Published in UCSD CONNECT Newsletter
Tuesday, Feb. 11, 2003


Click here
Poem:
Angel Angles
Poem: Angel Angles
There are about 4,000 "angel" investors in the US. Who are these people? And why do they invest? You might enjoy the poem I wrote for the UCSD CONNECT newsletter, published May 14, 2002.

There are 3 kinds of equity for a startup company:
  1. Cash - from FFF (fools, friends and family), venture capitalists or angels-investors, or banks. Banks don't lend without collateral (mortgaged home, for example). The others invest for the upside.
  2. Intelligence - the knowledge and experience needed to make a business successful. From the outside, this comes from experienced VCs or angels who bring good intelligence in addition to money. This kind of investor is the best bet for a corporate or advisory board. Avoid "directors" who want to be paid "big bucks" with no "skin" in the game.
  3. Sweat - the blood, sweat and tears that founders put into a fledgling enterprise. This is the most valuable form of equity. Most founders typically invest all of the three types of equity in their company.
Like many good angel investors, I'm interested in startups for the fun and excitement of being involved with a ground floor opportunity, re-living my own days of entrepreneurship. I am willing to risk my cash investment, plus my knowledge and experience. But I wonít invest any "sweat" Ė Iíve done that already and have no wish to re-live the experience.

Iím uncomfortable about co-investing with FFF Ė naive investors (rich uncles, dentist friends, in-laws) who invest without any intelligence equity whatsoever. These people cannot help when trouble arrives, and when things go well their expectations are often way out of line.

My own rules for investing are simple: Good people, good market, and good deal.

I must like the founders, preferably more than just one. I like to see an engineer teamed up with a marketing & sales person, with a sensible view of market-size and growth-rate. The financial person can be part-time - a good CFO can come later, when strong growth is under way. The founding team should have the ability to execute for the first few years Ė thatís when most startups fail.

I look for good products in growth markets with significant revenue potential. I donít invest in companies that plan to grow to $ 5m in 5 years Ė thatís too small to generate anything worthwhile for the investors. Iíd rather back a company with dreams of generating $100m in a $1b market. If they fail, and just get to $50m, then itís still worth my involvement.

Finally, the deal structure should be right. My money should be going into product development, marketing and revenue generation Ė not into paying the foundersí hefty salaries. I like deals where the founders are betting a lot more than I am Ė which keeps them working hard and running fast. If the company makes it, Iíll be rich Ė and theyíll be richer! No company cars and expense accounts until AFTER the company is profitable. My first question (after Iíve decided the people, product and market are worthwhile) is: What are your salaries? If my investment is contributing to salaries and directorís fees, count me out.

My motto has always been: Letís have some fun and make some money!

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