Beginner's Guide To Building an Angel Investment Portfolio - Part One

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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.

  1. DON'T invest if you can't afford it
  2. DON'T invest in Lifestyle companies
  3. DON'T put all your eggs in one basket
  4. DON'T invest if you don't believe in the team
  5. 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.

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Comments (13)

 
Nov 24, 2013 - 8:02pm

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.

This is undoubtedly the most important thing.

 
Nov 25, 2013 - 3:37pm

I actually started my own company and I think the same goes for giving equity out for people who want to join or invest in your product. I recently had to fire someone on my team and got equity back because its still early on. The team is everything. Everyone on the team has to bring something of value to the table. That may be knowledge and contacts. It may be money. The easiest way to tell things about the team would be asking how they would tackle problems and why they should be part of the team. People often times look for the exit from the get go. A lot of it comes down to having the right attitude. Some who has the right attitude is willing to put in the extra time. Even if a particular person cannot work 50-80 hours a week on the start up if they are willing to show they can show up for a consistent 10-20 hours and perform well on deadlines and strategize properly before executing an action then they may be the right person.

The one example the I have where my ex partner made a mistake was when we were planning a launch event for our product. He wanted to rush the event even though the product hadn't been through a proper testing phase. I decided to let him take charge and book the day for the event while I handled the online marketing and set him up with a few contacts. He decided to contact the person 3 days before the event and booked the event for a bad time (4:30pm on a Monday).

A good way to deal with these kind of problems is to have a consistent (not constant) level of communication. We implemented task reports that were do every 1-2 weeks. If someone shows they are resistant to an idea like that. Have them suggest their own idea. If they cannot come up with an idea and they are still resistant to new ideas then they may not be right for the start up.

 
Nov 29, 2013 - 3:47am

You can talk to local universities to talk to them about their business/entrepreneurship programs. That could be a way for you to search for talent. It may be hard though. Most of the people who advise at my university are ex-entrepreneurs who have made their money and have run out of things to do with their time. Although there are a few people who are currently running their own companies. It is possible. Better yet joining up with a few friends and basically starting your own small SMALL cap PE group. Like 30-50k for 15%-25% equity and connections and business advise/legal (if you have a lawyer buddy who is interested). Start with small safer bets like food trucks slowly build out your portfolio. If my current venture fails I will most likely bid my time building up capital to do just this.

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