Angel investors provide startup companies with capital – typically when the entrepreneurs have exhausted their own funds and those of willing friends and family, but before venture capitalists and other investors are willing to invest. Consequently, Angel investors face a great deal of uncertainty in deciding in which entrepreneurial ventures to invest. Different investors have different ways of managing this uncertainty including limiting their investments to businesses that they already know well or those where they believe that their personal skills can make the greatest difference.
The (fictitious) firm Analytic Angels takes a different approach. They base their investment decisions on very rigorous analysis. All investment, particularly angel investment, is a numbers game. Investors know that some proportion of their investments will fall short of expectations, but are banking on those being outweighed by some meeting or exceeding expectations, and hope that if they invest in enough different businesses, some will turn out to be extremely successful. Analytic Angels use the latest analytical tools to try to reduce the probability of investing in businesses that fail to meet expectations and to increase the probability of investing in those that will generate very good returns.
As part of their overall strategy, Analytic Angels spend a lot of time considering possible decision biases so that they can avoid them. For example, they know that familiarity and recency biases can lead people to overestimate the frequency of things they see often or have seen recently. For this reason they collect objective data from potential customers of new businesses rather than relying on anecdotes from entrepreneurs about people who have expressed interest in products or even their own personal opinions. They are also careful to avoid survivor bias – the tendency to infer that if a particular business is successful all businesses that are like it in a specific way will be successful.
When you're finished, go to the How It's Done section.