Angel Strategy
By Kelly Perdew
Over my last 10+ years of early stage technology investing I’ve had a lot of people ask me how to do it. There is a LOT that goes into it but there are also some pretty good guidelines that my late mentor, Luis Villalobos, taught me. BTW — Luis founded the Tech Coast Angels, was a founding member of the Angel Capital Association, and spent his time helping other angel groups form and learn.
As of this writing, I've invested in 48 early stage deals and had 8 liquidity events.
Here are a few things I think you should consider if you want to start investing in early stage tech:
1. Diversification. Plan on making 20–25 investments in this asset class (early stage tech) in order to get the diversification required for the very high return. Luis had run Monte Carlo simulations on many many sets of performance across Tech Coast Angels (at the time the largest angel group in the country and may still be the largest non-virtual group) and many others. It takes 20–25 “bets” to capture the return. What that means is you need to determine your “unit bet” just like in Vegas and stick to it. How much of your personal financial wealth do want to allocate to this class? If it is $100K, then you will be making $4–5K investments in each company. Unfortunately for them, most angels make 3–4 $25K investments based on a dinner they went to or a buddy told them about a company and one (or two) end up shutting down in the first year or two. A spouse says “What the **CK!” and the investing ends. No diversification. Bad experience. Sub-par returns.
2. Timing. You should diversify over time as well. I tell most angels to think about getting their 20–25 deals over a 4–7 year time span. Makes those bite-sized chunks more manageable with cash flow and also de-risks based on market fluctuations. You’ll also give yourself some more time for one of your earlier deals to get liquid and then you can play with “house money”. And from a returns perspective I would think about this with an 8–12 year time horizon…meaning that’s when you’ll see your returns.
3. Deal Flow. I’ve seen a lot written by some very smart early stage investors warning people who are not “in the flow” to not participate in early stage investing. Meaning, they won’t see any of the best deals. And I would say that’s probably true for later early stage rounds, but I still believe there are many many ways into the earliest stage companies (up to and including Series A). If you do not live in (or have access to) a high-tech “hub” you can find out quite a bit and even get access to deals very easily now virtually. AngelList and other investor marketplace platforms enable quite a bit of this. At Moonshots Capital we are geographically agnostic and have developed relationships with VC, entrepreneurs, industry service providers over the years so that we’re seeing 100+ deals a month, but only digging in deeply on 1–2 we like then investing in 1. Many times we’re filling a round that already has a lead VC investor. I agree you do need some access. If you’re just going to one dinner a month to see 4–5 pitches, you likely aren’t going to get into what others consider to be the best deals.
4. Subject Matter. Do you want to be involved in any way helping the company or not? If not and you’re purely financially driven for this decision then I’d say pick companies across a few sectors for diversification and so that you can play market movements. If you do want to get involved (even if only to assist in making introductions) you’ll probably want to pick companies or sectors where you have some knowledge and/or passion.
