Beginner's Guide To Building an Angel Investment Portfolio - Part OneSubscribe
This is a 3 part guide to starting your own angel portfolio. The first part will be general guidelines. The second part of the series can be found here
Jason Calacanis had a great quote in an article on PandoDaily this week that said
If normal people can gamble their money in vegas, why can't they angel invest?
It's a very valid point.
For people interested in going into early-stage VC, nothing shows more interest and experience than having invested in startups before. While not everyone can have VC experience, it is much more feasible to have angel investing experience. As more and more people become interested in startups, many more can afford to write a 10k or 25k check to start making angel investments. Online investment platform like Angelist has also revolutionized the industry. You can set aside a few thousand dollars for Angel List and 5 minutes later, you can start investing! If you are angel investing for the first time, here's 5 basic Don'ts to keep in your mind.
- DON'T invest if you can't afford it
- DON'T invest in Lifestyle companies
- DON'T put all your eggs in one basket
- DON'T invest if you don't believe in the team
- DON'T be so goddam goddam optimistic
Don't invest if you can't afford it. If you want to build an angel portfolio, you're most likely investing in the earliest stages of a company's life. Nothing is for sure and there are just so many things that can go wrong. Venture capital is a high risk high reward game - you must be able to financially withstand, and be prepared to lose 100% of your money. Even professional venture capitalists will on average lose 2 out of every 5 investments. Sacrificing 5% of your wealth in hopes of getting in early on the Facebook could be worth it - 50% is not.
Don't invest in Lifestyle companies. Understand the nature of venture investing. The high risk high return game only works if the company is scalable and could return high multiples of your money. What I like to call lifestyle companies are service companies. Law firms, your local deli, a small dental practice. None of these are scalable. You will need to add heads proportional to additional revenue and it's impossible to achieve hockey stick growth. You will never get an exit or an IPO out of your local BagelMaster.
Don't put all your eggs in one basket. This one is simple portfolio theory. Venture investing is so risky that you have to diversify risk by making a number of investments, usually 20+. Only then do you develop a nice portfolio of investments to spread out your eggs. This sounds simple but you'd be surprised how good some CEOs are at selling you their idea. You think it's the greatest thing ever and you think it will be the next Facebook. On top of that, there might be famous investors that are part of the round of financing. Refer back to the 2/5 failure rule - everyone make their own judgements and even elite professionals are often wrong.
Don't invest if you don't believe in the team. Team Team Team. That's the biggest factor in early stage investing. Good ideas are commodities - a dollar a dozen. The true hardship of a startup company is being able to form a core team, toil through obstacles with no direction and severely limited resources. Only rockstar entrepreneurs with balls of steel can make it. Believe in the team. Invest in A teams with B ideas and not B teams with A ideas.
Don't be so optimistic. Lastly, please be skeptical of everything a founder tells you. Ask him why he makes those projections, what assumptions did he make, why he made those assumptions. What is he going to do to validate those assumptions, why did he choose to target that specific audience and etc etc. It's the job of the founders to infect you with passion and make you excited about what they're doing. It's their job to try and get money from you. It's up to you to decide whether you are going to dig deep and find out if they're the real deal or all bull****. A quote i really like is
You have to set yourself up for success in order to succeed
So do everything you can to set your self up for a successful angel portfolio and worst yet, don't become a investor in a dumb company just because you didn't do your homework.