Interactive resources for incubators and accelerators
Interactive resources for incubators and accelerators
Interactive resources for incubators and accelerators

Angel Investing 101

This section provides an overview of all of the key information you need to start on your pathway of Angel Investing. It looks at how Angel Investors differ from Venture Capitalists, why someone might want to invest and the importance of networks to help them do so. It also provides some practical steps for getting started and building out that first portfolio.

Being Accredited

An Angel Investor is an individual accredited investor that uses their own money to invest in startups, usually in exchange for convertible debt or ownership equity. An Accredited Investor is an investor who is able to invest in unregistered stocks.

The US definition of an Accredited Investor is an individual who makes more than $200k ($300k with spouse) for at least 2 years with ongoing expectations of the same; An individual (or married couple) whose (joint) net worth exceeds $1M, excluding the value of a primary residence; A trust with more than $5M assets.

  • 0

    of Angel Investors in the US are accredited

  • 0

    of those who are accredited in the US actually invest

The Difference Between Venture Capitalists and Angel Investors

  • Investment Size

    VC funds have large amounts of money to deploy (from other people’s capital). They need appropriately sized deals, often in the $10M to $100M range and much bigger if they look at later stages (they take 2% per annum, 20% as profit – this is known as the 2/20 structure). Angel fundraising is most likely to be in the range of $500K to $1.5M with their own capital.

  • Goal for returns

    VC returns are almost all due to a few huge exits. They look for “unicorn” potential (over $1B company). Angels are more often invested in the sweet spot of acquisitions of around $50M.

  • Maturity of ventures

    VC funds invest in fewer, later-stage companies while Angels invest in more, earlier stage companies.

How Does Someone Learn To Do This?

First and foremost, you will need to learn from other Angels, which can be done either by finding them and having 1:1 conversations or joining an Angel group/club. In a group, everyone can still be an individual investor but you also get the chance to be presented companies every month, that are not guaranteed investments. Just pitching with other investors can help you gain a sense of what you are looking to invest in, how, and about different strategies for investing. This will also help narrow your focus and expertise.

There are also Angel accelerators available that you can join, where a pool of money is committed beforehand, which creates the urgency to invest. Milestones are also created for when investments need to happen, which can help to attract stronger, more investment-ready companies. There is also more structure for the investors, which can help make them stay more engaged and learn faster.

Being part of an accelerator means that you can learn from your peers in a more structured environment and have access to the most up to date resources on types of investment structures, exits, and relevant market information.

Reflection

One downside to being in a group or club is that even though Angels can find companies that are interesting they may not invest in any, as they may not have the time to do their own due diligence and there is no sense of urgency to actually invest.

Ecosystem Level: The Importance of Cultivating Investor Networks

Angel investor networks help strengthen the entrepreneurial ecosystem as a whole. They help to foster the next generation of innovative ideas and take most of the risk when developing and investing in a new venture. They help to create virtuous capital cycles, and capital trends in the marketplace for the impact investing landscape. Angel investor networks also increase the access to capital for entrepreneurs, seeing as they are usually the first and only investors that will take that “leap of faith” as well as the risk for startup enterprises. In of itself, the creation of investor networks as a whole also helps build relationships with funding partners, which can then inject new capital into the ecosystem.

  • Angel investors know the risk and that they will fail more times than they succeed in their investments. But usually, the winning investments make up for the failed ones.

Why “We” Angel Invest - The Angel Investors Theory of Change

Angel investors, especially those focused on impact, want to make the world a better place. They the excitement of being the first to “discover” a company and thrill of searching for (and sometimes finding) unicorn companies. They also want to make money for themselves – and they payout for being an Angel investor, depending on the model of the company, can be enormous (note: there is money to be made. With discipline, 25% annualised return is a reasonable goal (excluding inflation).

Angel investors also get the chance, if they wish, to manage a diversified portfolio, which can reduce portfolio risk overall. They are usually largely uncorrelated with other asset classes, which also reduces their investment risk.

As an Angel investor, you can also learn about interesting companies, ideas, people, and of course deals. They have the unique role of working in-depth with their companies to help them succeed above and beyond giving them financial resources. And by helping their portfolio companies, they make a difference in the economy as a whole.

Reflection

A lot of Angel investors got into the business because they want to use their life experience and share it with others, as well as be advisors to companies and use their connections to help them.

Some Angel Investing Options

Building Your Portfolio. What Does It Look Like?

The biggest consideration when building out your portfolio is to keep in mind the size of portfolio you want to have a mix of companies. You should start with a minimum number of good, quality companies to spread out the risk because of the high failure rate (~20 if possible).

Since a typical minimum investment is $25K (USA/Europe), think carefully about how to achieve the desired diversification and develop your own goals/guidelines. Learn how to invest as part of a group investment and invest in what you know, increases your chance.

Spend time on deep due diligence to improve your investment outcomes including looking at market trends, competition, potential negative impact that could be create, and geo-political factors (including effects of natural disasters and other “acts of God”) all of which could affect your investments. Also, always remember that data should be taken “with a grain of salt,” some is old, incomplete, and/or misleading.

Practical Tip

Invest only a portion of your net worth dependent on your risk tolerance.

Typical guidelines include:

  • 5% of your assets excluding primary residence
  • 10% of free cash flow (strive for an internal rate of return of about 25%)

Why Do Startups Fail?

  • 01.

    Market-related failure

    The number one reason cited in the ecosystem is because of a market-related failure. Many times they have a product or service that won’t survive in the broader market or they launch too early and they aren’t ready for the demand from their specific market.

  • 02.

    Team-related failure

    Other times it is team-related; building a team to match the velocity at which a business needs to grow is no small task and in many cases, especially in emerging markets, finding the right talent to match the roles you need as a startup without being able to pay a competitive wage can make or break your business if you aren’t creative in building and retaining talent. Also with growing and scaling any business, there are growing pains where roles might need to be shifted and even founding members might leave or change.

     

  • 03.

    Project-related failure

    Other times it is project-related where there just wasn’t enough research done before product or service development and so the business fails to meet the perceived needs of its clients.

Reflection

Due diligence is incredibly important when building your portfolio!

EXERCISE / TOOL

Key questions to ask in your due diligence

  • 1.

    – What is the problem they are trying to solve?

    – How big (quantity in dollars, people, market, etc.) is the problem?

    – Why hasn’t it been solved before?

    – Is this the right team to solve this problem?

    – Who is helping them (financially, as advisors, etc.)?

    – Does this solution/proposed solution actually solve the problem?

    – Does the market think this solution actually solves a problem well enough for them to engage in it?

Why Do Startups Succeed?

According to Bill Gross, the founder of Idea Lab, companies’ success can be broken down by the following categories and percentages:

  • 01.

    Market timing = 42%

    When they have entered, what the current competition looks like, etc.

  • 02.

    Team = 32%

    Do they have the necessary skills to succeed on their team or do they need to hire additional people to fill skills gaps? Do they have strong leadership and team culture?

  • 03.

    Idea = 28%

    How original and innovative is the idea? What is the need that it is filling? What is the market potential for that need?

  • 04.

    Business model = 24%

    How well thought out is their business model? Do their financials and financial projections make sense? Do they have a good handle on how they are going to make money and scale?

  • 05.

    Funding = 14%

    Funding is not the main barrier to the success of a company.

What Makes a Great Company?

  • 01.

    Market opportunity

    As mentioned above for why companies succeed, the market opportunity is one of the biggest factors in making a great company or a failed company.

  • 02.

    Product/solution

    How is this company creating a solution to a problem? How scalable can this product/service be? How much will people pay for it?

  • 03.

    Team

    Again, looking at the expertise on the team and the roles they have filled that are needed.

  • 04.

    Growth in revenue

    Seeing evidence of traction → revenue (this varies in opinion).

  • 05.

    Execution and/or business model development

    How well-developed the business model is and how well-versed the entrepreneur is in pitching it to you as the investor.

Resources

  • The Single Biggest Reason Why Start-ups Succeed

    A TED talk by Bill Gross, founder of Idealab

    Watch
  • Angel Investing by David Rose

    The Gust Guide to Making Money and Having Fun Investing in Startups

    Read

Next:

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