Complete Guide to Angel Investing
Angel investing has become very popular - from successful founders to executives - many are Angel investing.
But WHY?
And HOW to be SUCCESSFUL at it?
Here is YOUR COMPLETE GUIDE TO ANGEL INVESTING!
1. Why Angel Invest ?
There are several main reasons to Angel Invest
To make money
To learn
To give back to the community
For fun
To later become a VC
2. Angels investing to Make Money
Most Angels invest to make money - while this maybe seems obvious it is not always the case.
To make money as an Angel you need to be disciplined, consistent, networked, and ultimately lucky!
3. Investing for Fun, Learning, or Impact
Surprisingly some Angels don’t care as much about making money.
If you are very well off you may be interested in investing for Impact, to Give back to the Community or for Fun - staying in the game and learning.
In this case returns are not the main goal.
4. Angel Investing to Become a VC
Some go into Angel investing because they think it will help them get into venture.
This is a typical path for exited founders or executives/MBAs.
Generally this is great for showing you are willing to learn on your own dime, you have a point of view and conviction.
Provided you have a portfolio of 10-20 companies or more it would be positively viewed as a track record by VCs.
5. Commitment, Budget, and Strategy
Like anything in life, to be great at Angel investing you need COMMITMENT and CONSISTENCY.
To make money as an Angel Investor you need to have ENOUGH SHOTS ON GOAL.
You need at least 10 hours a week / make at least 1 investment per quarter for this to make any sense.
In addition you need to start with a budget.
While I’ve seen people start with as low as $1k investments, it’s tough to be taken seriously by founders below $10k.
Ideally you want to write $25k-$50k checks initially.
For example, you can start by vesting $100k in the first year into 4 investments at $25k each.
Alternatively, for $100k you could do 10 deals at $10k each.
It is better to make more bets but it also will require more of your time.
6. Ownership and Outcomes
Venture outcomes follow Power Law - most startups will fail, some will be singles and doubles - 1x or a few X and very very very few will be 10x or 100x.
For that reason VCs focus on OWNERSHIP in PERCEIVED WINNERS.
Angels can’t do that.
WHY?
Because angels write small checks - they don’t own enough & typically get diluted over time.
Angel Strategy <> VC Strategy
Most VCs run concentrated portfolios, while most Angels benefit from diversified portfolios - more shots on goals!
Why?
Because more shots on goals theoretically maximizes finding a really large outcome. It also maximizes learning.
Let’s look at a specific example.
You invest $25k on a $5M post money cap at pre-seed for 0.5% initially.
By the time that company is worth $1B your stake would be about 0.15% or $1.5M or 60x return.
That would obviously be an exceptional outcome!
Consider how many investments you need to get an outcome like this?
If you make 10 investments - $250k with all others being 0 - you are still doing great.
If you make 100 investments - $2.5M with all others being 0 - you are losing money.
In reality you will hit some distribution of outcomes between these extremes but the main takeaways are:
VENTURE MATH is HARD.
DIVERSIFICATION is KEY for ANGELS
7. Generalist or Specialist ?
As an Angel - you need to decide what you will invest in.
It should be based on your SUPER POWERS and UNFAIR ADVANTAGE.
If you really know and are passionate about some markets - be a specialist.
If you have a unique network - be a generalist.
8. Specialist
Being a specialist is a lot simpler.
You tell people you only invest in X.
You can really dig into a space and know what’s going on.
The downside is you don’t enjoy diversification outside of the space!
That means you will miss 100% of the opportunities outside of it.
9. Generalist
Being a Generalist is A LOT harder from the due diligence perspective.
Most Generalist Angels are really focused on FOUNDERS.
That is, they decide to back not because of the space but because of the team.
Generalists process a higher volume of deals.
10. Main Investing Criteria - People
Most angel investors are very people driven. They focus on backing “awesome founders”.
It makes sense because at such an early stage with so much uncertainty you ultimately bet on people.
11. Deal Flow
The biggest challenge you face initially as a new Angel investor is deal flow - where do you get it?
Through your network
Other Angels / Angel groups
VCs - this is hard
Content Marketing / Social Media - this takes time!
Most Angels pair up - they find other Angels with similar interests - again easier if you are vertically focused & invest together.
The benefit is not just that you share deals with each other - you can also do due diligence together.
More sound & more fun.
Sometimes Angels organize into much bigger, typically geographically local, groups.
This has a benefit of much more deal flow and collective bargaining power - like setting the round price.
The downside of Angel groups is bureaucracy and process.
An obvious source of deal flow is your network - likely you already have angels you know so start with them. As you back founders they start sending you deals and you keep expanding your network.
Hussle and put yourself out there in the beginning.
Some angels who are founders or prominent executives get lucky and get invited to co-invest with VCs after VCs issue a term sheet. These are so called strategic angels, amazing operators and connectors that are considered to be a value add by VCs.
The advantage of co-investing with a VC is presumably less risk - since VCs have a lot more resources to do due diligence on the space.
If you as an Angel can get involved with a reputable VC firm that could be a really big plus!
12. Your Investment Process
After deciding if you are a Generalist or Specialist, your budget, and your pace - you need to decide on your process.
How many meetings will you have?
What is the list of questions you will ask - red flags - green flags?
Due diligence
How will you organize the deal flow ?
Will you have a max cap or target ownership, and if so what are they?
Will you be comfortable investing right away or waiting for the whole round to come together?
Having a clear and well defined process is absolutely key - you want to prosecute deals consistently and quickly so you don’t miss out.
Evolve the process as you go but always have a process.
13. Your Process is your reputation
The other reason why you should have a process is because so many angels do not!!
Founders and co-investors will appreciate if you are focused and organized.
This will help you build reputation, and get into better and better deals.
14. Your Value Add
In addition to the process your reputation is your value add.
How will you help founders after your investment?
Do you have the network they want?
Do you have helpful industry experience?
Why do they want you on the cap table?
It is actually fine to not have a value add - just be clear about it - you’re just investing.
What is not fine and what ruins your reputation is:
Being indecisive
Wasting founders’ time
Promising and not coming through
Bugging founders
15. Worst kind of Angel investing
Takes forever to write a tiny check.
Keeps pestering founders every week.
Demanding constant updates.
Giving unsolicited, incompetent advice.
PLEASE, PLEASE, PLEASE, DO NOT BE THAT ANGEL INVESTOR.
16. Know your place & play a long game
I don’t mean to be harsh, I am coming from a good place and I take my own advice - behave according to your check size - earn your stripes, play a long game.
Don’t ask for crazy terms, don’t pretend like your check is more than it is.
17. Playing a long game
There is a difference between being lucky and consistently being good.
Venture and Angel investing is a long game, don’t expect quick outcomes or quick great outcomes.
Become known, become a deal magnet. Win over time!
18. Portfolio construction
Fred Wilson is famous for explaining VC math as 1/3, 1/3, 1/3.
1/3 of deals go to 0
1/3 are singles and doubles
1/3 are big outcomes
Within big, if you are very lucky, there are mega big.
There are caveats!
Let’s face, it none of us are anything close to Fred Wilson and unlikely will be.
Secondly, Fred’s math is NOT for pre-seed, it’s for Series A.
First check failure is MUCH HIGHER with pre-seed.
Assume 30-40% graduation to Series A & then apply Fred’s numbers.
So what does this mean?
Shots on goals & diversification is KEY
Consistency over time is KEY
Bet on people - that’s just common sense
Don’t worry about losing money - that’s expected
Take big swings
Be honest with yourself
19. Planning and Gut Checking
How long will you Angel invest before knowing if you are any good at it?
Likely 3-5 years!
Here is how to do it:
Plan X investments over 3-5 years
Have a budget and a goal
Keep maniacal track of EVERYTHING- down to a penny!!
Be sure to track your portfolio value and update when the company raises subsequent rounds.
I have met so many angels and micro VCs who SUCK at keeping track of their investments!
Be awesome - it’s YOUR money!
Make sure you get monthly updates from each company.
Every year see where you are.
Both quantitatively - are you getting meaningful markups?
And qualitatively - do you feel like companies are making meaningful progress?
Grade yourself!
Summary
There is so much to Angel investing but the key is knowing why, being organized, and having a strategy.
Be patient and play the long game.
If you want to co-invest with 2048 Ventures or another fund start by sending them your deals.
Good luck and have fun!
