Milwaukee businessman Dan Steininger compiled "10 Commandments" for angel investors to follow. The commandments were the subject of a panel discussion at the Nov. 15 Wisconsin Early Stage Symposium, with the aim of helping entrepreneurs and early-stage business owners understand how angels operate.

“These are basic rules that will improve any business at any stage,” said Dan, who has led a large corporation but now focuses on helping smaller firms grow. “It’s interesting to note that turnaround specialists also have these kind of rules. They are going into businesses that, in many cases, haven’t followed these rules at some level, and they are bringing the companies back in line with the rules.”

Whether you are looking for angel investment in your venture or just want to set your company on a more solid path toward increased value, it pays to understand how angel investors operate.

 

THE SUCCESSFUL ENTREPRENEUR ANGEL FUND

TEN COMMANDMENTS OF INVESTING

As Compiled by Dan Steininger

1. Management: Invest in good management that demonstrate an ability to execute the business plan rapidly, provide sound cash management, raise additional cash, lead the organization, and adjust the business plan when necessary. Seek leaders with industry expertise that are passionate about their missions.

2. Board of Directors: Invest only in companies where the majority of the board is comprised of strong outsiders who possess solid business expertise and wherever possible industry expertise. The board of directors should push the company to execute the business plan rapidly within cash constraints and should insist on management changes if needed to accomplish the plan.

3. Business Plan: Insist on business plans that address the technology, customer acquisition, and competitive challenges of the company and that establish the business with realistic gross margins, unit volume, and return on capital invested.

4. Access to Capital: Identify and establish relationships with sources of capital with a history of investing in like kinds of businesses in the amounts needed for the company. Work with these co-investors for the betterment of the company and all investors.

5. Product Need: Invest in companies that have an in-depth knowledge of their customers’ usage habits and needs through to the end user. Forsake all “nice to have” products or services and save your resources for “must haves.”

6. Sustainable Differentiation: Invest in companies that have advantages such as patents, first-mover position, exciting new technologies, proprietary processes, and/or key customer contacts.

7. Market Size and Trajectory: Invest in companies that have large and/or rapidly growing markets or can realistically create such markets.

8. Technology Risk: Have sufficient technical expertise at the table, or through your trusted contacts, to evaluate all product and technology claims before committing resources. Invest in companies with a low risk of market loss to alternative technologies.

9. Investment Execution Risk: Have established the ability to influence key company decisions, create and link milestone to capital rounds, and seek early customer learning, as through the use of prototypes. Receive fair valuation of your investments and don’t release investment funds until the full round is raised. Stay involved and work with companies to assist -- aggressively if necessary -- in their success. Invest only in those companies that provide a clear exit strategy for your investment.

10. Investment Evaluation Risk: Ask tough questions of the company, listen to the market, and discuss the company with other investors. Make certain that the entrepreneur appreciates other people’s money and recognizes tha the company’s first responsibility is a return to the shareholders. Always speak the truth with your fellow members and be loyal in voicing any opposition or apprehension.

Click here for a Wisconsin Technology Network article on the Wisconsin Early Stage Symposium panel discussion of the 10 Commandments of Angel Investing.

Dan Steininger is president of Steininger & Associates in Milwaukee and one of the three founders of Successful Entrepreneurs Fund. He can be reached at dsteinin@execpc.com. He compiled the "commandments" from best practices he gathered from angel networks throughout the U.S.

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