A little under a year ago, we hosted an event called Angel Bootcamp that was a primer for folks thinking about getting into angel investing. It was really helpful for the community, and it is something we’ll probably do again, although not every year. (Here’s a great recap on the Boston Globe’s tech blog.)

Of late, I have had a number of friends who have recently become more active as angels and have been trying to track down some of the advice from the event. Just yesterday, Adam Medros, SVP of Global Product at TripAdvisor and an entrepreneur advisor for NextView, just asked about when the next event will be. He felt like, given some of the opportunities he was seeing, a “primer on angel investing” would be helpful.

With all that in mind, here’s Angel Bootcamp — The Blog Post Edition.

I’ll try to keep it very short and sweet, and keep in mind that this is just one person’s POV. I’ll also include a few links below with some other perspectives. (And although this is written for angel investors, I think entrepreneurs can only benefit by increasing their knowledge around these investors and hope you’ll continue reading if that’s you. And if you just want to learn about different types of angels and what motivates each, my partner David has written about that before here.)

A Primer on Angel Investing

Why Invest?

  • Seed investing is a fun way to stay actively engaged in the startup ecosystem. It’s primarily a way to get exposure to exciting companies and entrepreneurs and to learn. You can make some money doing this as well — maybe a lot of money if you get really lucky. But it’s pretty hard to be wildly financially successful as an angel.
  • Because of this, it pays to have the right expectations which also guides some of the other points I’ll make. Professional VCs typically fight tooth and nail to generate 3X returns for their funds over 10 years, and the vast majority of funds fail to achieve this. Maybe you’ll do better as an angel since you are investing smaller dollars which is easier to deploy in this segment of the market, but maybe not.
  • I find the best angels tend to do great not because they are fixated on making money but because they want to participate in the startup community and be involved in the most exciting projects. They also want to help founders and want their products and services to exist.

Investment Strategy

  • Outcomes in angel investing exhibit a power law. Chances are, of 30 investments, your single best investment will be 10X better than your second best investment. And there is a decent chance that your second best investment is probably worth more than all your other investments combined.
  • I’d approach angel investing with a multi-year, multi-investment plan. Think about how much money you’d be very comfortable putting to risk over a 2-3 year period. Then divide that by a certain number of companies and that gives you a sense of how much money you might want to invest in any one company.
  • Normally, I see angels who are getting started doing the opposite. They get into this by making one or two investments and put too much at risk at the beginning. I think having a multi-year plan allows you think more rationally about all this.
  • When thinking of how much money to put at risk, I’d think to myself, “There is a decent chance I’ll lose half my money.” But if I can make 3X my money or more, it shouldn’t matter. Some people just assume that they’ll lose 100% of their money and the upside is gravy. I think it’s not quite as bleak as that if you make smart decisions and invest in sectors and geographies with a lot of innovation.
  • Outside of Silicon Valley, you can usually get into pretty good deals writing pretty small checks ($10K or so) if you are relevant to the sector you are investing in. So, if you’ve been a successful internet founder or have launched great web/mobile products, most founders would love to have you in a round even if your check size is small. If you are coming from a completely different background, you probably need to write a larger check to optimize your chance of getting in.
  • Overall, I’d recommend being pretty prolific (5-10 investments a year), writing reasonably small checks at first, and thinking of your investments in 18-36 month cohorts of companies or mini portfolios.

Sourcing

  • There are a lot of options here, so I don’t want to go into much detail. Just a few pointers.
  • Invest in stuff that you know and where you can help. It’s more likely that you’ll see better opportunities and coinvest with better people because of your own credibility in a broad sector.
  • Invest with others. Find people who you think are great and don’t be worried about following their signal. Run in packs and learn from the group (but keep an independent mind).
  • There are a lot of options to expand your deal sourcing, like AngelList, syndicates, angel groups, etc. Talk to people and get their POV. I’m not that dogmatic here.
  • Hunt. The best investment opportunities require you to hunt for them. Unless you have an incredible network, don’t think the opportunities that just show up in your inbox are likely to be very good. Don’t be too proud to reach out, try to get into great opportunities, and get rejected. A very successful venture capitalist I know once remarked that their firm had a not-so-high hit rate in terms of the % of investments they wanted to make over the number they were actually able to make. At first, that seems like a bad thing, but in reality, it’s a good thing. It means that you are chasing and stretching. I’d rather be fighting for the types of investments I might not be able to get into than have a 100% hit rate among lesser opportunities.

Selection

  • Be founder driven. Invest in extraordinary people. Focus on an individual’s upside, character, drive, and ability to just make things happen.
  • Focus on the authenticity of the opportunity. Don’t be allured by seniority. It’s just as unikely that an experienced enterprise software exec will successfully start the next great consumer social company as it is that an 18-year-old non-technical high school student will start the next great enterprise software company.
  • Favor investment rounds with strong leads that haven’t raised millions of dollars before you. If a company does not have a strong lead investor AND has raised a lot of money before, there is probably some baggage that you may not really be equipped to decipher.
  • Remember the power law. Because of this, focus on startups that are either (a) going after something really, really big or (b) can get a lot of traction really, really quickly. Preferably both.
  • Don’t be cheap. If you are investing with strong leads, pricing will be reasonably close to market prices. There is no sub-prime market in early-stage investing.
  • Be fast. Two meetings should be enough. Keep in mind that if you are writing really small checks, it might be hard to get more than one meeting. Be decisive and straightforward. It’s also totally fine to say, “I’m in for $10K assuming you raise at least $750K,” or, “I’m in as long as there is a lead.” Just follow-through on your promises and be responsive and consistent.
  • Don’t worry too much about deal terms and structure. If something smells fishy, just walk away. But if it’s in the realm of market, just go with it.

Helping

  • Don’t over-estimate your ability to help. This is sometimes really tough for former operators. Don’t think that you are the difference maker that can take a mediocre opportunity and make it a great one. Also, don’t think that you are going to invest in a company in a tough situation and be the one who is going to be able to save it. It’s the founder’s company, and one way or another, you are along for the ride.
  • The best way to help is (a) recruiting great team members and (b) finding customers that will actually close. Strategy may help, but founders get a ton of strategy advice. Intros to fancy people may help too, but always give the founder an out. Knowing that (a) and (b) are the most important, I’d say, “Hey, I can intro you to person X, she is obviously not someone who will become a customer tomorrow, but I could see her as someone valuable to know. Tell me at any point when I should make the intro, but definitely don’t feel any pressure for me to connect you unless you think you are ready.” Founders could spend all their time taking meetings from well-meaning intros that might be helpful but are most likely are too senior or too irrelevant to really help.
  • Never ever, ever do anything that may hurt the company. No matter what. Even if things seem like they are going sideways, keep in mind that there are probably very few things you can do to help and probably a lot of things you could do to hurt. Do no harm and try to make the founder sleep easier at night, not add to his or her sleeplessness.

More reading:

Brad Feld’s suggestions for angels

Dharmesh Shah’s “Avoiding Undue Diligence: My Strange Approach to Angel Investing”

Scott Belsky’s angel investing diagram

Sim Simeonov’s “Patterns of Successful Angel Investing”

Gabriel Weinberg’s lessons learned from five years of angel investing (podcast)

Paul Graham on how to be an angel investor

 

Other thoughts? Leave a comment below.