Learnings From My Angel Investing
I’m not the most prolific nor most prominent angel investor, but I do angel invest (portfolio)… and have been doing so for almost two decades. I like to angel invest because I am passionate about innovation and entrepreneurship, and I learn a ton about companies and categories that help me in one way or another.
I never joined an angel group, so I do not know the experience of such. I’ve been a lone wolf investor with my hypotheses and, in some cases, have instigated a funding round to come together via my contacts and relationships.
Here are some learnings from almost two decades of angel investing:
1/ The most important piece of knowledge was one that a VC imparted to me: ⅓ will fail, ⅓ will return principal, and ⅓ will return your fund. What does this ultimately mean? ⅓ of the investments will create your overall return, so you need to have enough investments in the market to account for the zeros and 1x’s.
2/ Be consistent with your capital allocations - both in terms of frequency and in amount. I try to make three angel investments each year. I’m pretty religious about this, and I should be more religious on the amount I invest, but I’m getting better. By being consistent with your allocations, you essentially are dollar-cost averaging into the market. Some years or periods may see higher valuations, and some may see lower. By being consistent, you are minimizing additional risk to your investments.
3/ I am hypotheses lead. While I have a specific belief I am prosecuting with my angel investments, I know not everyone is, and many folks are opportunistic. 100% of the time I’ve been opportunistic, I have either had a big fat zero or a 1x investment. So, I’ve learned the hard way and focused on my hypotheses. A recent example of an idea I’ve had around angel investments is “upgrading the UX of the sports card and memorabilia industry, a tens of billions of dollar industry.” This hypothesis led to investments in Noxx, Dibbs, Loupe, Altan Insights, and Genamint (who sold to PSA/Collectors Universe).
4/ A zero return is not a failure. Since I am hypotheses-driven, I usually learn something from every angel investment, making me a better angel investor and operator. The insight or learning may cost a lot, but it’s not all a failure.
5/ Assume you will have zeros. There are such odds against every single entrepreneurial endeavor. The chance of succeeding is low, and you will have impairment across your portfolio, which is natural. Do not get angry or upset at the entrepreneurs who hustled their tails off to try and make magic happen.
6/ Be helpful. I try to stay in swim lanes where I can be beneficial to the CEO and/or management team. I try and help with introductions, reviewing of strategy and marketing plans, standing in on interviewing prospective employees, and more. I am happy to help give time to have a better chance of success ultimately.
7/ Not everything is a 100x return. Even the top-tier VC funds do not hit 100x every single time. Nor do they hit 20x returns on every investment.
8/ Be prepared to hold your investments. I’ve been lucky that my average number of months until exit is 33, but I know many investors who wait longer. I assume that I’m on a seven to ten-year time horizon for each investment.
9/ Your investments are illiquid. Remember that you cannot call your capital once committed. You’ve invested in a business, and too bad if you “need” that money. You should not invest the money you need. Frankly, assume you will not get that money back.
10/ Be human, kind and respectful. It’s not that hard to be a good person. I’ve seen plenty of investors be annoying to management teams, create issues, and be awful. Be friendly and well-intentioned, and you will gain a reputation as easy to work with. This will help you get into investments that may have otherwise been out of possibility.
I hope the above is helpful. I know many of you angel invest as well. If you have any tips you’d like to share with the Operating Partner community, please do not hesitate to reach out and share… and I’ll include them in a future OP.