Angel investing in startups is probably the most challenging form of private equity there is. Having been involved with the Tech Coast Angels for the last 10 years I have seen 150+ companies funded and very few successes. One thing I have learned over that time is that about 90% of the investors in each company "didn't know what they didn't know". Why? Unless you are a full-time investor looking at business plans all day long or have some particular domain expertise, angel investing will turn into a charitable tax exercise for you. However, the angel successful investments usually had these top 10 elements going for them:
1) Investors had to earn their right to be part of the investor syndicate and invest
2) Investor syndicates typically had less than 5 investors investing $50K-$250K each
3) The investor syndicate only had domain experts in the deal
4) All investors contributed contacts, industry knowledge, or competitive intelligence
5) The investment was sourced through contacts and NOT blindly through random submissions
6) Sophisticated angels (like VCs) had looked at many other competitors from around the U.S.
7) The valuation was never an issue in negotiations and understood by both parties
8) The market was in a recession and lacked institutional Venture Capital competition
9) The management team had worked for previous start-up successes and failures.
10) The company had bootstrapped itself into a beta product and had to pay customers
Having investors who are unknowledgeable about the game or industry creates numerous issues which I will expand on later.