Every great journey has its ups, downs and blind spots. Angel investing is one of those. Based on personal experience, I can assure you that no matter how much or for how long you study angel investing, once you put your own money on the line you will be surprised by how the process really works.
Because hindsight is 20-20, I asked several experienced angels to tell me about their own experiences. What I learned is invaluable for any angel investor starting this journey.
The Most Common Surprises
The most mentioned surprise? Angel investing takes far more time than most investors expected. Time in this case means a couple different things.
- Exits take longer than advertised, so patience is important: Many find that it takes longer to get returns than they thought. Jeff Carter originally thought exits would happen in five years, “but it’s more like seven to ten, and leaning to 10!” It takes startup companies time to grow and build value.
- The time required: Others point to the amount of time it takes to do the work of angel investing. Peter Hemken says, “It is a greater investment of time than I expected, not only initially in due diligence, but also on an ongoing basis to keep abreast of progress and issues in each startup.”
- Each deal is different: Part of the investment of time for angels relates to how different each company and deal is. Adam Pegues has particularly noticed this: “It’s messy. There are no identical deals, terms, teams, timelines, and opportunities. Each one must be thoughtfully dissected and considered – at the quickest rate possible – to come to a decision of whether or not to invest.”
- Picking the best deals isn’t easy: Another surprise for many is how hard it is to pick the companies that will be successful. So many entrepreneurs make excellent initial presentations. Many angels have heeded the idea that because angel investing is risky they need to make multiple investments to mitigate risk. As Kevin Learned notes, “While investing for home runs is important, you can’t pick them in advance and must build a portfolio.” With lots of entrepreneurs seeking capital, experienced angels have discovered how important screening and narrowing the field is – and also that much of this is about analyzing people more than companies. More angels are learning how to sift through dynamic personalities to bet on which CEOs can build strong teams and execute.
- How little it takes to make a difference: At the same time, some angels are surprised to find out how many of their investments are really helping these startups thrive. Scott Gale says, “A small amount can make a big difference for a startup. I thought that you would need to make $500,000 investment but many of these companies at the seed capital stage can be helped with as little as $10,000 and some coaching.”
Sound Advice to Ease Your Journey
Once you get an angel talking, many keep on sharing. Discussing these experiences and surprises led to some great advice. Here are a few of my favorites:
- Have the right “risk” mindset: A good starting point? “Be OK with the risk element of angel investing,” says Aviva Ajmera. Make sure the money you invest is money that you can afford to lose without losing sleep. Hedge your risk by developing a portfolio of investments rather than just one or two investments.
- Build a network: “Don’t go it alone. Learn from others, but don’t be afraid to develop your own sense of opportunity and value,” suggests Pegues. Kathy Chiu builds on this idea: “Consider finding a group, fund or some other way of diversifying your portfolio and tap into other angels’ expertise and deal flow. They can be your sounding boards.”
- Take your time at first: Many experienced angels advise new angels to “go slow.” Take the time to read everything you can get your hands on, watch and learn from other angels, and participate in due diligence work before you write a first check. I’m glad I personally followed this advice – I spent about seven months learning from others before I made my first investment.
- Write small checks: Related to going slow is writing smaller checks than you may have thought initially. Carter puts it this way: “Calibrate your capital carefully. You need to reserve a lot more than you think for the next rounds. Initial check sizes should be smaller than you probably think you should write.” Michael Dornbrook also suggests, “Keeping a lot of ‘dry powder’” – money to invest in later rounds to keep the startups going and protect themselves from being clobbered in a down round.”
- Do due diligence: Due diligence is an important part of angel investing, and it needs to be done while downplaying your emotions, especially if you fall in love with the entrepreneur (trust me, I know!). Andrew Stern suggests “Do your due diligence as best you can, but in the end invest in as many deals as you can. It does come down to the law of averages, diversification.”
Angel investing is a fun journey. Along the way you will revel in learning about new companies, discover how the startup investing process works, and reap the rewards of time well spent. You will also likely encounter many surprises, and hopefully these experiences and recommendations will help you to detour around a few of them. In the meantime let me know what other surprises or recommendations you have to share. We can all learn from each other.
