Angel Investing 101: Don’t Fund Idiots

I heard a Warren Buffet quote once that made me laugh out loud; “I try to invest in [mature] businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.”

The next thought that ran through my head was: “I try not to invest in [early stage] businesses run by idiots. Because sooner or later, there won’t be anything wonderful to run.”

In Angel investing, picking the right founders is the most important thing.

After hearing hundreds of pitches, writing dozens of checks, rethinking the winners I missed, the investments that failed and the ones that worked out, there are six personality characteristics that occupy 75% of my due diligence process today.

1. Integrity. Truth is necessary, but insufficient. Which of these two answers to the question “What were your revenues last quarter?” would you rather hear? Around $40,000 or $35,600, but $10,000 was a one time project, $4,000 is a pilot for 3 months at half price and the rest is ongoing subscription revenue. (I’m investing with this person.)
2. Chemistry. If there’s no love, pass. It takes 5–10 years before, and if, there’s an exit. Don’t spend that time with people you don’t like, trust and respect.
3. Coachability. Ignorance is fixable, stupid is forever. Just don’t invest in idiot founders who can’t, don’t, won’t or only pretend to consider alternative perspectives. Wonderful founders are infinitely curious about what they don’t know. They constantly look for any information that can improve the probability of a successful outcome wherever it comes from.
4. Resourcefulness. Startups make something from nothing. Wonderful founders continually demonstrate jaw dropping creativity in solving problems or positioning their businesses to customers. Henry Ford dreamed of starting his business by selling tractors for years but realized that people were more interested in using existing roads for vehicles and pivoted.
5. Responsiveness. Is their response time reasonable? If a founder can’t manage to respond to someone who is giving them time, advice, contacts and money when they’re starting out, there’s no hope that they’ll get better over time. The most successful people I know get back to me just as quickly when they have $1MM of monthly revenue as they did when they only had $1,000 of monthly revenue.
6. Resilience. How do they handle adversity? Focused founders, working in their right space, are energized more than they are exhausted by the unending, unknowable and unpredictable existential startup challenges that face all companies

Success in this space comes over long periods of time and in ridiculously unanticipated ways by learning how to invest in prodigiously persistent people who voraciously consume support from their advisors, mentors, coaches and anyone else who can be helpful.

For example, one of my angel investment pals invested in a startup that was incinerated by a large company’s patent infringement. Years later, he received a fat check from the founder who had won an 8 figure settlement from the offending corporation with the help of a patent attorney he met in a bar!

That’s why we play this game.

If a founder doesn’t pass my personality diligence process, it doesn’t mean they’re an idiot. It does mean there’s no sense in wasting time, theirs or mine, going forward.

Make sure you set yourself up to enjoy developing your own investment process with people you can have fun with while y’all grow personally and financially.

Tony Wilkins is an active early stage investor and executive coach at Standing Oaks Venture Partners.