Ten Top Tips: Spot a killer investment

By on January 29, 2013

Thinking about turning angel? Here are ten tips on spotting a great investment from veteran angel investor Richard Hargreaves.

Firstly, the title is a false promise. With hindsight all investors can make stunning returns but even the very best make many mistakes and luck plays a major role in the real world.

Most importantly an investment is only a killer once it is realised. Everything else is dreaming. The acid test is the multiple of cash invested which goes back into your bank account after tax is paid. Nevertheless, if you want to improve your chance of success you should consider these ten pointers:

1. Team with vision and focus
Without a strong management team with vision, no investment will be a huge success. Alongside vision, you need to have focus and absolute commitment. Do not back somebody with a low golf handicap as they clearly don’t work 24/7.

2. Something you understand
NESTA published a report in 2009 called ‘Siding with the Angels’. One of the conclusions it drew about successful investments was that the angels backed opportunities they understood. Going for a market you know well versus a totally unknown industry is highly advisable.

3. Growing market
It is possible to achieve success within a mature market by taking market share from rivals (for example Tesco in the early 2000s) but it is much harder than scaling in a fast-growing market. Aim for the latter.

4. Demand
If there is no demand for a product it cannot succeed. It helps to have evidence of this before you invest but sometimes faith is needed. As Steve Jobs said ‘If Henry Ford had asked people what they wanted they would have said a faster horse’.

5. Scalable
The company must have a scalable business model. Starbucks is demonstrably scalable but each new outlet consumes cash before it launches. On the other hand many online businesses do not need cash for premises and staff and gross margins can flow down to the bottom line.

6. Exit
The test of any investment is what was cash was invested and what was returned. Only then can its true financial success be measured. So, exit – to whom, when and for much – needs to dominate your thinking when investing.

7. Due diligence
Even limited due diligence – rather than relying on blind faith – improves the chances of success.

8. Work with it
It can help to offer your expertise and knowledge to a venture but do not smother it – it is somebody else’s vision after all.

9. EIS
The Enterprise Investment Scheme (or EIS) offers such a powerful range of tax incentives that it is a must. It reduces net investment cost and losses on failure and it improves the after tax upside.

10. Cash
Remember that companies go bust because they run out of cash. Make sure that your investment is – or at least stands a chance of being – cash positive. Stay alert.

You will note that the first six points are about the opportunity and how well it might do whereas the other four are about managing risk. My final point on risk is that you must make several investments if you hope for that killer stake – a portfolio in other words.

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