What are the top 5 mistakes business angels are making?

I'm often asked about my biggest mistakes as a business angel. Here they are, and I think they are pretty representative of business angels as a whole.

I'm often asked about my biggest mistakes as a business angel. Here they are, and I think they are pretty representative of business angels as a whole:

1. Too much focus on the product, market, and competition

As a new business angel, I focused too much on the market and competition: Is the (potential) market big enough? Do they have strong competitors? What is their go-to-market strategy?

These are important, but when angels invest in the pre-seed stage, the market/competition matters much less than the vital element: The team behind the idea (see also point 2).

Also, the product will often be changed (pivoted) several times. So understanding the precise competition and go-to-market strategy for a yet-to-be-developed product matters much less in pre-seed angel rounds than in later-stage, say VC rounds.

2. Lack of team due diligence

As already mentioned, the team is everything. So for all experienced business angels, 80% of the investment decision depends on the founders' perceived quality.

There are founders I know where I would invest in ANY new business they do because I think they are truly unique and will succeed even in the "wrong markets". But there are also business areas I want to invest in but haven't because the teams I have met haven't impressed me enough.

But when meeting these impressive teams, I must do proper due diligence on them. What are prior managers/co-workers saying about them? If they are serial entrepreneurs, what experience did these companies' investors have? (by the way: I also encourage all founders to do proper due diligence on the investors they are talking with!). In the past, I have several times "forgot" to do this check, with quite severe results...

3. Founder vesting / SHA

I mainly invest in teams and not solo founders. But when making a startup with, say 3-4 founders, one thing is guaranteed: 1-2 of the founders will leave the company before exiting.

The reasons for leaving are many: Lack of motivation (quits), lack of needed skills as the company grows (fired), general problems working together (founders growing apart), etc. But it creates many problems if up to 50% of the share capital is not active in the company: Problems getting new funding due to "dead equity", active founders wanting a vast pay rise, etc.

The shareholders' agreement should govern such situations, which among other things, stipulates how founders' are earning their shares over time (called "vesting") and if founders leaving the company should be selling their shares - and if so, at which price. But I have been in situations where a less-than-optimal shareholders agreement was already in place, and I decided to live with it because I wanted to invest in the company. Huge mistake!

4. Internal and external alignment

One of the reasons why co-founders are leaving is the need for more internal alignment on the vision between the founders: What company are we trying to build? Do we have global ambitions or want to create a lifestyle business? Do we want complete control, or are we ok with getting diluted by external investors?, etc.

Often founders are not fully aligned when starting, and over time this creates severe problems for the company since the founders disagree on the direction. On a personal level, I have several times in the past not discussed this long-term vision deeply enough, which also creates problems for me since my dream of making a "big company" is not in line with all the founders.

5. Investing alone

When initially investing, many business angels (including myself) make the significant mistake of wanting good deals for ourselves rather than sharing the deal with other potential co-investors.

Now, 15 years later, I am acting entirely differently. I would rather own 3% of five companies than 15% of one startup. I therefore actively invite the company to talk with business angels I trust in the hope of them joining as investors.

There are so many benefits in investing together: From several yes on the same deal, much deeper pockets when needing to re-invest in later rounds, more people to help the company on an ongoing basis, more people to make warm introductions to later-stage investors, etc.

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