20+ lessons learned through international angel investing
Almost 4 years ago i started as a complete novice in the then for me completely new world of angel investing after well over a decade career in the international real estate sector. Through this period, I invested mainly directly but also indirectly in over 10+ different Start-up’s mainly through syndication in 5 countries (Belgium, Netherlands, Estonia, Finland, Brazil/Portugal)and trough very different angel groups with by definition very different cultural backgrounds. A steep learning curve followed, up till today I consider this as my greatest intangible asset of angel investing. I consider myself midway in my angel investment career. Most important I like it.
Tons of articles are already written about the indeed very crucial team (complementary, solo vs multi founders, experience, coachable), revenue traction (I recommend not to invest in pre-revenue start-up unless you are a really experienced angel/investor) , the size of the market and last but not least the scalability and valuation criteria and by definition remote exit possibilities. Here are some other, in my view a bit under lighted aspects of angel investing.
1. Consider and appreciate your intangibles. Thinks like the built up network, the learnings, the new insights, the gratification of helping, the satisfaction of being part of building out a great company, to take part of a really disruptive product that is conquering the market, the desire to give back, to coach the new generation of entrepreneurs, to improve and work out the reporting, to sit on the board, to really help the company grow/survive, to think along with them and to spend a lot of time with the team, your syndicate (some of them become colleagues/co-advisor’s and even friends), your co-investors. To enjoy the studying, your learning curve. As an international investor add as bonus the new international network’s and the broadening of your (investment) horizon. Very important to, if not crucial, the time you like & want & choose & to spend in the start-up world with all of its players. If not, stop immediately with angel investing, it’s not worth it.
2. Angel investments are probably the most illiquid asset class off the planet. Period. To make things worse, 75% will fail and you should hope that the so called “Law of Power” at the very least will break even your portfolio -although this is far from a guarantee. Remember rule one, you do it for the intangibles.
3. Hence determine at forehand how much you will invest in this asset class. Not more then 10% of your net worth is recommended. Stick to it. Really stick to it. Consider the vast majority of these investments as lost. At the very least be mentally ready to write off three quarters of your portfolio. If you are lucky/skilled (probably a bit of combination of both) and if a good part of your portfolio struggles trough the so called serie A crunch…, the law of power will one day work/could work in your favor. A well vetted portfolio returns a 25% IRR according to must studies …. Consider the cost of opportunity. Money invested in this asset class you cannot invest in something else whether it be the stock market, an apartment, a holiday with your family… Do it for your education & the intangibles as remembered in rule 1 above… And yes, of course one should aim for a financial return, but it should (never) be the primary driver.
4. Aim for at least twenty plus well vetted investments. (It means I am somewhere almost midway and still enjoying it ;) Five or less invested start-ups’ is NOT a diversification even less a portfolio, no matter what others try to convince you/themselves otherwise. Ticket size matters a lot. It’s unbelievable/astonishing how many tourist and even experienced angels fail this very basic rule and be in self-denial/have no idea what they are financially doing (or rather not doing…). It’s mathematically proven (power of law vs normal distribution), over and over again, it cannot be the other way. Do not count on beginners’ luck it’s just as dumb as playing and hoping for the lottery.
5. Learn & read about the “power law” of angel investing. In a portfolio of startups, we know that we will have losers, but our very few (if any!) winners have to be so big that they compensate for the losses of ALL the losers.
Angel investing does not follow a normal distribution as in other asset classes such as the stock market. Hence again the importance to have a broad, not five, not ten, but really a 20+ portfolio. If one has to choose between follow on and new investments, choose for new investments. But do some part of follow up investments in your winner’s. You need both to succeed financially in start up investing.
6. Always invest through a broad (>5 and <15 members) syndicate or alternatively/indirectly as an LP. Never alone. This increases your chances to succeed (smaller ticket size, more commercial introductions, more ‘smart’ money). More important have no FOMO -Fear of Missing Out, easier said than done, this can only be learnt through investment experience… Luckily, with the years passing by and experience slowly growing, this feeling diminishes (tough never will vanish) as one becomes automatically pickier…
7. Vet your investments. Hence the importance of being in the right syndicate(s). Deal flow quality really matters!!! Garbage in, Garbage out…Therefore aim for/work towards for angel 2.0 networks and co-operate as much as possible with seed VC funds. Build up your investment criteria (it took me a few years and I am much pickier now then when I started…! That’s the learning curve every angel has to pass. I am sure that in a few years from now my investment criteria will further evolve! Most of the start-up’s presenting themselves in a first angel round are convinced that there is a market and there is a problem, while -after scrutinizing/vetting a bit- there is no problem and sometimes even no (sufficient) market/demand… This is really the core of vetting. No textbook can learn this. I had to learn this the hard way… A very good alternative is someone else (preferably being paid and with the right skills) to do the (pre-)vetting! Or invest as an LP in a seed fund…I think it’s a very wise decision, whenever financially possible, to allocate part of your money into a VC (seed) fund and part of your money into direct angel investments. I learned that if you can provide (potential) value as a skilled angel 2.0 investor, the VC will waive (part of) the minimum required investment ticket.
8. And then we have the “copy cat’s”. “The Uber of…”/ “The Whatsapp of…”, “The market place of…”, Most novice angels/first time syndicates invest in a “would be copy cat’s with a poor perceived problem combined with bad/poor execution powers”- the great start-ups present their selves first/try their luck first with angel 2.0 networks or seed-VC’s…! That’s OK, as long the first-time angel investor’s /first time syndicates learn and enhance in their thinking/investment experience. This hard reality makes part of the learning curve every angel and its (first time) syndicates must go through before going the next level (“angel 2.0”). Find the most experienced angels within your syndicate and learn/listen from them is probably the best investment a newbie angel can do. Most additional mistake that I see within angel 1.0 syndicates is…It’s not because you are successful entrepreneur you have the right angel investment skill’s…!!!
9. Do post-mortem, learn from your mistakes and grow trough angel investing 2.0.
10. Get into angel 2.0 networks asap. Unfortunately, you have to pass through angel 1.0 networks first. There is no other way, that’s how it works. Angel 2.0/Seed VC have undeniably better-quality deal flows… The real magic happens when (seed)VC’s and 2.0 angels complement their strengths.
11. To get into angel 2.0 networks, one must specialize (specific language, geography, specific sector skills & contact’s…. While at the same time building out a broad network over : founders/(international)angels/syndicates/VC’s/incubators/accelerators/start-up bankers/all kind of start-up intermediaries/headhunters…
This takes time. At least a few years, as you have to build up the mutual trust. Reputation matters. But it’s the best intangible long-term asset investment angel can make in his/her own angel career.
12. To get in angel 2.0 level, both founders as well the angel investor 1.0 must also learn the economic units/metrics that drives a healthy angel investing: (expansion/renovation/contraction)Monthly Recurring Revenue (MRR) versus one off set-up fees/consultancy, churn, a healthy LTV/CAC ratio, sufficient runway, knowing the start-up distribution channels/client’s persona, a clear focus …, the unique selling points… Working with a CRM etc. Monthly & consistent reporting of most important KPI’s…Later on (approaching pre-serie A things like cohort analysis, budget forecast and analysis start to come into the picture…) Also, the importance of a healthy cap table (do not invest in a startup at angel round level where there is already too much dilution — at the contrary I prefer to look at companies which are ‘’bootstrapped” and only search in a later faze for funding…!). Most novice 1.0 angels/ 1.0 syndicates lack this framework.
13. In my experience most of these units will be found in a Business to Business Sofware as a Service (B2B SaaS) environment. Focusing on B2B SaaS is therefore not a bad choice… Whatever you do, pick a niche. (B2B SaaS, B2C, marketplace, fintech, edtech, impact, crypto,…). Avoid, as a beginner, B2C (needs a lot of funding) and hardware (“hardware is hard” — meaning it’s difficult to scale) as well B2G.
14. Analyzing the B2B environment (“not all B2B are equal”) of the start-ups. Look how sticky the turnover is. Is the application deeply built-in the customers start-up’s (high switching costs vs easy to replace high churn one off business?) It’s OK to have some consultancy, set-up fee’s in the first rounds of angel investing provided one can see a clear path to (future) recurring revenue. Do a (independent!) competition analysis before the investment decision/voting is signed/done. It’s the only way to avoid investing in a poorly executed copy cat with inferior/outdated technology and features…
15. A first angel round is mainly equivalent with a financial option as information between founder and angels is asymmetric. A due diligence is required but will not solve this problem. Only post-investment you will learn of the winner potential or not. Things like: can the founders pivot or not? Execution & execution & execution…? Coachable or stubborn as hell? Do they learn…fast ?
16. Do no harm to your invested start-up’s by unneeded intervention or distraction. No kidding, I have seen this happening a lot… Keep the founders focused & the board strong.
17. Learn the start-up alphabet/investment lingo. Things like good/bad leaver, liquidation rights, tag and drag along, convertibles with/without a cap vs a pre-determined valuation, a ‘healthy’ cap table (in all cases management ,within first angel round(s), should have at least > 75% of shares in order not to start with a to big dilution! No VC will enter into a company if founders are too much diluted from start !!!) … Start with (very) small ticket sizes, learning all this is more important & will pay off itself multiple times then by immediately putting a big check combined with FOMO into a particular start-up….
18. Spread your wings. Visit other eco-systems (at least once per year). Being active & having contacts in other start-up eco systems pays off itself multiple times.
19. Follow up & bridge rounds. Have you/your syndicate dry power enough to invest in your early winners and/or protect your portfolio? If not, you/the syndicate will learn the hard way what a ‘limited runway’ and the ‘monthly burn rate’ of a startup implies…
20. Invest consistently. In good and bad times. Over a period of at least 5 years. Angel investing is a marathon, not a sprint. I started to invest 4 years ago and will do (hopefully) 6 more…It’s only after 7–10 years that — if you are lucky & skilled- the magical exit could/start to happen…
21. Never invest without roughly seeing an exit path. For late stage VC’s the size of the market does matter, so be wise as an angel investor…and do not invest in very niche neither very small markets in market size…
22. Last but not least. The so called “Serie-A crunch”. Most companies never reach/pass serie A-requirements. Limit (neither avoid, neither invest a lot of money) in angel syndicates who have never experienced a serie A crunch…in other words stay away from angel syndicates with poor vetting powers. However, it could be a smart move to invest first in these syndicates anyway, via small tickets, to get instant access to a geographically specialized networks which on its turn, enhances the angel investor chances to grow/be invited towards angel 2.0 networks as you will have something to put on the table via a specialized international angel network. My portfolio winners all came from people I contacted via the angel 1.0 networks first, who on their turn invited me to their trusted networks (to which I am very thankful).
Good luck with your first/further steps of angel investing. Remember it’s about the intangibles & learning curve first…