One of the most common questions I get asked by folks I talk to is how and why one can/should angel invest. I’ve answered this enough times that I figured I’d write a Snack Bite to help consolidate my thoughts.
One thing I will say, here’s what angel investing is NOT
Here’s what it actually is
Said differently, angel investing is not a get rich quick scheme. It is a wait patiently and help as much as you can situation. There is plenty of risk but also plenty of reward in more ways than just money.
So here’s some tips for angel investing.
Manage Your Risk
Most importantly, if you are starting to angel invest. You need to define your risk. The best way to describe this is with an example.
1st: Ask yourself this question, how much can you afford to either lose or not see in 5-7 years?
2nd: Let’s say its $15k a year. Based on that amount ask yourself the following questions. Do you want to invest in one company you know very well, 2 companies, 3 companies?
3rd: Let’s say you said 3 companies. Now you have to figure out how to invest $5k into 3 companies. How will you be able to do this? Either it means investing in the earliest round of funding possible for a startup (sometimes called friends and family rounds or funds like boldstart who invest at day one) or showing your value to a source of companies (VC fund, professional angel investors, angel groups, etc). Many times founders have minimums they can accept in a round but going through trusted networks enable others to advocate on your behalf.
4th: Be truly prepared to lose the money you invest. If a startup fails, you can write the losses off of your taxes but it’s still lost money. So figure out what you would be comfortable with in that adverse scenario.
5th: Consider investing alongside people who do this professionally if you can. Another way to manage your risk is to join a round led by someone else who does this full time. In cases like this, the lead is probably evaluating is there enough runway for the startup to hit the milestones necessary for the next round, what are those milestones, what hires need to be made, etc. Investing alongside someone in this scenario can help limit some of the risk as well.
Invest in People/Products You Know
When I first started angel investing, it really wasn’t to make any money. It was to be part of a journey with people and products I believed in. The first investments I made were in Prelude, Logixboard, and Koyfin. The first two, I knew the founders from college. They were close friends of mine who I knew I wanted to back no matter what. My investment was a way of taking a journey with them and helping my friends out in any ways I could. I put in a very small amount of money, but my friends were happy that 1) I committed on the spot and 2) they knew me super well and wanted me to be a small part of the company. This is also a way that you can get smaller check sizes accepted, because the founders know you personally.
Koyfin was a different investment. I used the product extensively and started chatting with the founders on Twitter. We met in person and I asked to invest because I had been looking for Koyfin’s product for a long time and loved using it on a daily basis. The founders again accepted a smaller check because they knew I was an avid user and wanted feedback on beta releases and also future product roadmap prioritizations.
Different ways of getting to the same path but either I knew the people very well or the product very well. This also ties into the risk mitigation described above.
Think About Angel Investing from a Portfolio Standpoint
One of the hardest things to do in investing generally is to think about all your assets as a portfolio. There’s so much noise out there constantly, friends getting wealthy off of bitcoin, another person selling their Pokemon cards for thousands of dollars, your friend’s dad buying a new house with winnings from a trifecta bet on the Kentucky Derby. While these things do happen, many of these outcomes are associated with luck.
Thinking about portfolio allocation can help you accumulate wealth steadily over the long term. So when you think about angel investing, you should think about your total assets. For me personally, angel investing is ~15% of my overall portfolio (trending down recently as my day job keeps me from being able to invest as much of my time alongside the personal checks I write).
The rest of my assets are in public markets and in the fund I work at. So I think of my allocation to each asset class as a function of risk and decide on the % of my assets that I would like to have exposed to that risk. BTW, just for clarity’s sake I do not have a big portfolio at all :) but regardless of how big or small your assets are, this is a good approach to thinking about how and where to invest.
This also means that my objective in the public markets is not to catch the crazy winners but to invest in the index or companies that I believe will outperform the index over the long term with low risk of capital loss. I have friends that made tons of money buying options on Gamestop but that is not right for me. I would rather preserve and steadily grow my assets in the public markets while generating potential excess returns through angel investing and my day job.
Articulate How You Can Help
Angel investing is a very personal thing. You will in many cases have a direct relationship with the founder(s). So you want to be very clear on how you can help. Perhaps you have particular experience in an industry or a role, know candidates that they can hire, can help on fundraising, have several advisors who could help, or simply will be a product tester and give feedback on new product releases.
These are all valuable to an early stage team, but most important is to clearly state what it is that the founders can call on you for so that they do not waste time asking you for help when you are not able to. This will preserve a great relationship with the founders and help you become personal friends over time.
Deliver on What You Say
This goes along with the section I wrote above. Once you have stated how you can help, make sure you deliver!
When a founder does call on you, write down the ask(s) and execute upon them to the best of your ability. By doing this you are aligning yourself in the startup’s success. A lot of people will say, “I gave them money isn’t that enough.” If that’s the mentality, you will likely lose money very quickly when angel investing. If you can help, then doing so in the area that you are able to will help unlock value that will benefit your own dollar investment in the future.
Seize Opportunities from Your Network
Finally, now that you’ve done the hard work, don’t turn down good opportunities! When you have helped a founder, they or the people who got you into the company (VCs, other angels, etc) will hear that from the founder. They will likely send you more companies that could be a fit either because they are experiencing similar problems or are in a similar sector. You never know where each company can lead and as long as you are following the rules of managing your risk, you should take these referrals seriously as usually they are now more qualified then when you first started investing.
As you can see, there’s a lot to think about when angel investing. However, one thing I will say is the rewards are far more than just monetary. Even in situations where the financial return has not been positive, I have gained lifelong friends and lessons that will hopefully help the next founders achieve their visions.
The best feeling in the world is trying to help others achieve their dreams and more often that not, that will come back and help you achieve your own as well.
Feel free to comment or reach out to me on Twitter @shomikghosh21 if you’d like to chat about this more!