Everybody knows somebody who’s crazy about playing fantasy football. But have you ever played fantasy angel investing? It’s just as much fun and equally as addicting.
A new company called Exchangel recently became the world’s first fantasy angel investment platform. It allows aspiring investors to hone their skills, trade opinions and advice with other investors, and study the startup market — all without the risk of using actual money.
Services like Exchangel are evidence that angel investing is growing in popularity. As of 2012, the Angel Resource Institute had 170 member groups and 20 affiliate organizations within its ranks, and a study by the Center for Venture Research revealed that U.S. angel investors invested more than $20 billion in 2010.
If you’re thinking about joining the growing ranks of angel investors, make the fantasy a reality by asking these five questions before financing a startup:
1. Who is the management team?
The business world is all about people, and successful businesses require successful people in leadership roles. Angel investors need to have a firm grasp on the credentials, personalities, and past successes of the startup’s management team. Even if the startup hasn’t yet fully hired its staff, you can easily assess whether it’s heading down the right path by looking at who the company is considering for leadership positions.
2. Is there a market need?
The primary reason for startup failure is a lack of market need. Make sure you fully understand the product you’re investing in, the current market climate, and the level of competition. If there’s no competition in the market, that’s a definite red flag. Regardless of its industry, ask the startup to prove its concept and provide a business model.
3. What makes it unique?
What’s stopping another company from ripping off this idea? Make sure the startup has a sustainable competitive advantage. Ask the applicants how they plan to stay ahead in their industry, and make sure they plan to protect themselves by patenting their offerings.
4. How will it make money?
This is one of the toughest questions to answer, especially at the early stage of startup investing. At this point, there isn’t a whole lot of data available to help you analyze the viability of a business. That’s why it’s so important to study its business plan and use your own business savvy to determine the startup’s profitability.
5. How will it spend my money?
As an angel investor, you’re investing your own hard-earned money, so make sure you know that the startup has sensible spending habits. Ask the applicants to provide a thorough breakdown of their finance plans, and ask exactly how they plan to use your money. You owe this to yourself.
Being great at fantasy football doesn’t necessarily mean you’re great at playing real football. Fantasy angel investing, on the other hand, can do wonders toward honing your skills as a real-life investor.
It takes a lot of hands-on experience to be able to differentiate a great opportunity from a bust. But once you become confortable with your judgment and are ready to invest some real money, ask yourself these five questions before reaching for your wallet.