Most angel investors take pride in their portfolio and are happy to brag about all the startups which they’ve backed which have gone on to make tonnes of money. However, the reality is that very few who manage to do this, because most startups fail. This is why most investors don’t have too many success stories to talk about, which is why it’s very hard to really be able to track their performance – after all, they aren’t very forthcoming about all the duds which they funded.
This is why we need to flip the question and ask them – “How many failed startups did you turn down? How many of these failures were you smart enough not to back, because you realised there was a flaw in their business model, and they wouldn’t be able to hack it?”
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This is a valuable metric – because it shows that the investor is frugal, and is not burning cash unnecessarily! For a long-term angel, the ability to turn down startups which will flop is as important as his ability to spot a successful startup.
It’s also a good idea for angels to track their anti-portfolio – all the companies which they turned down, but which turned out to be wildly successful. It’s only by critically analysing all their hits and misses will angels be able to improve their performance going forward.
Investors demand that their entrepreneurs should crunch their numbers on a regular basis, and it’s just as important for them to keep a dashboard so they can do this for themselves as well!
[This post by Dr. Aniruddha Malpani first appeared on LinkedIn and has been reproduced with permission.]
