Money, Connection & Status: Observations on Angel Investing with Martin Rajcan (KAYA)- Part I/III
Martin Rajcan, General Partner at KAYA, shares his insights on angel investment. Having written his first angel check in 2014, he is a very prolific investor with more than 30 startups in his portfolio, two having already become unicorns after only five years in the game.
Before we start, some highlights:
- 😇 The angel investing market
- 🤔 Deciding what motivates you: money, status or connection?
- 🎯 Setting your goals
- 🌟 Setting your expectations
- 🚀 The different types of angel investors
The path to success in angel investing requires comfort with a high degree of uncertainty and lack of affirmation along the way. It’s a circa 10-year cycle and knowing whether you are a mediocre, good, or great investor. Even with the interim successes he’s had, Martin remains humble in his approach to angel investing and how he perceives himself:
“I prefer the word early-stage investor. Angel sounds glorified, and I think there’s enough people who glorify themselves in the sector, so I don’t want to be one of them.”
The total angel investments in the US were $23.1 billion and the number of active investors rose to 334,565 in 2018. Even more dramatic is the rise in angel investing around the world – in Europe the total market has doubled and in Canada it tripled.
The 2020 Black Report highlights that angel investment is by far the most popular form of funding amongst Black UK founders. 28% of founders received funding from angels, 6% more than those who received venture capital funding.
With the world turning to more inclusion, angel investment is definitely an important avenue to consider for both founders and those looking to break into venture capital.
There is no one way of becoming a successful angel investor but Martin shared with us a few lessons he learned and mistakes he has made along his journey. Through his guide, we got a better understanding of:
- The importance of goal setting and expectation setting when you're thinking about becoming an angel investor
- How to get started
- How to get better once you've started,
- And some basic tips about what to do, what not to do.
Set your goals
Everybody's motivated by different things. It’s important to understand what drives you. Before starting out on the journey, it's important to be honest with yourself and reflect on your own internal motivations. Do you want money, status, love, or a combination of these factors?
Internal motivations are important because all of our career choices and professional commitments are driven by our particular personal objectives and biases.
It’s also important to be aware of what sacrifices are needed. Angel investing has a long cycle so you need to be able to commit to not seeing liquidity from your investments for 10 years or more.
If money is important to you then you should probably be prepared that you won't make a ton, especially in your early investments as you’ll be still refining your judgment and your ability to access the most promising founding teams may be low. If money is your objective then the best option is to invest in high-quality public tech stocks, as they are likely to increase in value on a 10-15 year time horizon with very little risk (people will always buy Apple products!). Also you will sleep better at night knowing that your money is safely compounding at 5% - 10%+ p.a..
You are likely going to make a lot of mistakes in the beginning as an angel investor. Writing checks means you run the risk that 90% of your investments will be completely wiped out. You have to hope that the remaining 10% you invested will bring you a good outcome or enough to offset your losses. In angel investing, simply achieving an exit is already a good outcome.
“Those big exits you read about actually happen in a tiny amount of cases. If your first startup investment exits that is a successful outcome because most investments don't get an exit. A more realistic expectation of an exit as an angel investor is likely to be $15 - $30 million.”
For some people the status as an “angel” is a motivating factor, as it typically signals one is well connected and has money. A lot of the successful angels don't seek publicity and some of course do. Perhaps you don’t care about it, but some of your fellow angels will, and so it’s good to be aware of that when assessing people and opportunities.
Connecting, engaging with and learning from the founders you invest in can be an important internal motivator. If building relationships is what fuels you, then angel investing could fulfill this need as you will get to meet a lot of interesting people and learn about a sector or a problem and how to solve it. The learning is typically more visceral when you have money at stake than if you simply read or talk to people.
Martin’s primary motivation as an angel investor is driven by his desire to be connected with the founders he invests in. Money is an important factor but it isn’t his main motivation, as mentioned there are far easier ways to make money, and you can make venture-like returns trading stocks.
“I love the partnership and bond I share with founders. From 2016 to 2018, I had the opportunity to invest in a software startup in Berlin and be a part of the executive team. I was the CFO and right hand man to the solo founder. We built the company from the ground up to 20+ employees and $1m+ in revenue in about three years. We sold it for just under $20 million, so a modest exit. It was a roller-coaster ride and I built a strong bond with the founder and the entire team, and the experience was a lot more intense than just being focused on making money.”
Set Your Expectations
Now that you know why you’re doing it, it’s important to understand what you’re getting yourself into.
To start with, there are different types of angel investor:
Founder-focused investors bet primarily on people. They look - so to say - somebody in the eye, and they rely on their intuition to gauge whether this is the right founder to back. That intuition is developed by having seen hundreds of founders before, or just having a special talent for identifying exceptional people.
Momentum-focused investors base their activity on social validation. They go where the music is playing. They’ve usually developed a strong network of founders and other investors or angels and will use this avenue as a way to insert themselves into promising ‘consensus deals,’ deals where there is broad agreement in the investor community that they have a lot of potential.
Analytical investors are more cerebral and will use their analytical strengths to evaluate an industry and perceive the need for a solution within that space more accurately than others. They can look at a business or sector and pick the ones that others don't believe in or recognize an opportunity before everybody else.
All three types can be both wildly successful (or not). It's always a blend of these skills, but it’s good to think about which category you think you belong to or which one you identify more with than others.
This is part one of our observations on angel investing with Martin, keep your eyes peeled for part two. 🚀
About Martin Rajcan
After growing up in Slovakia, Martin studied and worked in other parts of Europe, as well as South, Southeast, and East Asia, and the United States. The varied set of life experiences provided him a unique vantage point throughout his venture capital career — he worked with the investment firm KKR for six years and venture firm Blue Bear Capital for three years prior to joining Enern — and he’s carried the experiences into his angel investing activities. He also developed an affinity for emerging markets. The relationships he built during his overseas stays allowed him access to some of the best founders and ideas in those regions and informed, among others, the two investments which turned into unicorns.
KAYA is an early-stage VC fund, with roots in CEE, investing in intrepid founders across Europe. KAYA evolved from Enern Investments — a regional financial group formed in Prague in 2010.
Ten years and €500m AUM later, Enern remains a holding for diverse investments while KAYA is conceived as a separate, focused successor of Enern Tech for all things venture capital, with 27 investments and latest fund of €70 million+.