Becoming an angel investor can be an incredibly rewarding and enjoyable experience.
You get to meet entrepreneurs who are pursuing their dreams and building companies that have the potential to change the world, often at considerable personal risk. Even better, when you write a check, you become a small part of that exhilarating journey.
It is perhaps a reflection of how much angels enjoy what they do that the angel market in the U.K. and throughout Europe appears to have remained buoyant throughout Covid-19 and the economic uncertainty it has created. In fact, as more founders successfully exit their companies, we are seeing a new profile of younger investors enter the market. This is good news for anybody looking to raise early-stage capital.
If you are thinking about starting to write some angel checks, here are my ten essential tips from a decade of angel investing.
Never rush. Unlike VCs, angels do not have to invest. Take your time getting to know both the ecosystem where you plan to invest and each company. The first point is particularly important; as a new angel investor, you need to build up your pattern recognition to know what a good deal looks like. You also need to make sure that you are investing alongside people and funds that are credible and share your values and approach to business. The waters are not entirely shark free.
Your offering. Anybody with surplus capital can angel invest, but if you do not offer value to the companies you invest in, you will be known as ‘dumb money’. Being a passive angel works for some people, but for the ecosystem to operate most effectively, you should want to offer support to your founders. Starting to help founders even before you invest is good practice to build a positive reputation. At the same time, make sure you are giving the appropriate level of support and not being overly hands-on or disruptive.
Team, Team, Team. When you meet a founder who has an idea that resonates with you or is operating in a market you find exciting, it can conjure up quite powerful emotions and it is easy to get swept up in the excitement (especially if they are good salespeople). You may reach the conclusions: ‘great idea, wrong team’ or ‘exciting market, wrong team’ or ‘great idea and exciting market, wrong team’. Sense check your conviction that this is the best team to win in their market. Ultimately, it is the quality and attitude of the team that are the key determinants of success in building any business.
Question track records. One of the biggest mistakes investors make is to assume that a strong looking resume – with academic and corporate achievements – equals success running a startup. Often the reverse can be true, with academic and corporate life insulating people from the nuts and bolts of building and running a business. Dig into previous achievements and their relevance. And assess the founders on more than just their resume – that hard to define thing called character is more important.
Do your (technology) diligence. Be rigorous in your evaluation of the technology. This does not necessarily mean digging around in the code base, but it does mean validating your key assumptions about what the technology should do. Ask for live demos, download the app, look at app store reviews, talk to the CTO (not just the CEO). Do whatever you can to get a feel for the real status of the technology and the engineering culture of the company. If you are unsure how to diligence the technology, see if you can set up reference calls with other investors who have done it themselves.
Stress test the go-to-market strategy. If there is one consistent weakness we tend to see with founders of technology companies in the U.K., it is a lack of sales awareness and an underestimation of how hard it is to sell things. Without an effective sales team, the business will fail. Probe the founders extensively on this area to satisfy yourself that they know how to build a sales machine and have the temperament to make it effective.
Be aware of vested interests This is part of having a credible go-to-market strategy but is worth a separate comment. Vested interests kill businesses. Founders either fail to identify them (a particular problem when the founders lack domain expertise) or underestimate them. This can crop up in many business models, but marketplaces is a classic one. If all the players involved in a market have existing and entrenched relationships, there will be significant resistance to any model that aims to cut out middlemen or drive efficiencies. Of course, it can work, but these forces tend to be powerful.
Understand dilution. Most angels are aware that they will be diluted when the company they invest in raises additional rounds of capital and issues more shares. However, not all companies dilute angels to the same extent and you need to be aware of companies that will require significant amounts of capital without the ability to increase the valuation of each round. Any business with a brick and mortar element (for example, F&B) can be particularly painful for angels since each time a new store is opened an equity raise is conducted and you get diluted. It is one reason technology is such a popular place to invest – done right, the company should be able to raise increasing amounts at increasing valuations each round.
Consider the exit. Being involved in a company as an investor is great fun – you feel part of the journey and live the highs and lows. But being a successful angel investor means making a return on your money. Avoid investing in companies where there is not a sufficiently large market to generate a high multiple on your money. Also, sense check whether there is likely to be an M&A/IPO market to enable an exit.
Take a long term view. This should be ‘take a really, really long term view.’ Exits can arrive quickly, but it is likely that the best performers in an angel portfolio will take ten to fifteen years to reach their full potential. You will also experience the failures before the successes. If you do not have patience, cannot stomach total losses and expect quick returns then this is not the asset class for you.
World News || Latest News || U.S. News