Angel investing seems to be new asset class which has become the flavour of the season. Lot of HNIs think it’s a great way of making a lot of money very quickly – all you need to do is identify a clever entrepreneur, put money in his startup, and you’re going to be become rich riding on his coattails. The fawning media coverage about highly successful entrepreneurs and the unicorns they have created helps to perpetuate this false impression.
The truth is that while being an angel can be very gratifying, to expect that it offers a quick road to riches is not true. As with everything else, if you want to learn to be a good angel, there is a learning curve you will need to master.
While it’s useful to read blogs and textbooks, unfortunately most of the learning in this space is experiential. The one common denominator amongst all angels is that they have made mistakes – and no matter how smart or wise you are, you will make them as well! These mistakes can be expensive, in the form of sunk time, effort and money. All you can do is try to minimize your personal mistakes. Reading a lot helps, so that you can be aware of some of the pitfalls which have waylaid others, but you also need to understand that there is no royal road to success in angel investing.
Before you whip out your cheque book, you first need to ask yourself why you want to become an angel investor in the first place. Some people do it because of FOMO – the fear of missing out. It seems that everyone else around them is boasting about how much money they made so quickly and effortlessly by investing in a clever startup, and they don’t want to be left behind.
There are lots of articles which describe how a startup which raised $1 Mn is now raising $6 Mn in just 6 months. Which other asset class can provide this kind of return? However, it’s easy to get carried away with this meteoric jump in valuations, but the problem is that everyone only talks about the success stories, and no one discusses their failures. Also, because founders are extremely clever and articulate, when they’re in sell mode, they make it very easy for you to part with your money. Fear and greed can make for a toxic combination!
While there’s lots of stuff you can’t control, the one thing that you can influence is your own behavior. What’s your personal investing thesis ? You should be able to describe this in one sentence. If you don’t have one, you are in trouble! Do you want to invest in a particular domain because of your expertise – because you think you can leverage your insights and network to help a startup in this space to succeed? Or are you happy to invest across all domains? Do you want to take a spray and pray approach, just because it’s the easy way out ? How much money are you willing to put in? What’s the pre-money valuation you are comfortable with? How hands-on do you want to be? Are you willing to double up on the winners? Are you willing to give more money if the startup doesn’t meet its milestones, or are you willing to pull the plug and let them die?
When you are starting off, it’s helpful to join a syndicate or a network, because you can learn from more experienced angels, and they can hold your hand. However, don’t get carried away and put in money just because everyone else in investing in a particular startup. Blindly copying others can never lead to success, and you will end up making a lot of expensive mistakes.
How can you make sure that you do well as an angel? The reality is that there is no formula for success. Let’s be honest, if there was one , no one would share this with you! The only advice I can give you is to play to your strengths. Find out what you’re particularly good at. Are you able to assess and judge people well? Are you a fixer? Are you able to network well? Are you able to introduce founders to CEOs? Can you help them with marketing? What do you enjoy about angel investing? Once you understand this, you will be able to do a far better job, because you can carve out a niche for yourself.
Rather than talk about what the formula for success is, it makes more sense to discuss the ways you can fail as an angel. There are hundreds of easy ways to fail, and I can promise you that you will discover new ones as well! There is no shame in failing, and we should share some of our failures with others, so that they don’t repeat the same errors. Too many failures end up harming the ecosystem, and all of angel investing will then end up getting a bad reputation. I agree it’s no fun losing hard-earned money, but think of each failure as the tuition fee which you need to pay in order to become a better angel investor.
It’s very hard to make money as an angel investor because these are very illiquid investments, which get locked up for long periods of time. It’s very hard to predict which companies will succeed, and which will fail. Unfortunately, the majority of them do fail, and most angel investors will lose far more money than they will ever make on angel investing. However, this is one of those dirty little secrets which most angels don’t talk about, because they are ashamed about the fact that they ended up backing a loser. It’s much more fun bragging about your successes ( even if they are much fewer), so that the rest of the world admires how astute you are.
It’s much easier to fail when you’re not disciplined. It’s surprisingly easy to put in small amounts of money in many companies, just because a friend tells you to invest in a company which is “hot”. You then don’t have the discipline or bandwidth to follow up on each of the companies, and they get lost in because you don’t have a process. Haphazardly signing a cheque whenever you happen to have money to burn can be harmful to your wealth !
If you are aware of the pitfalls, you reduce your risk of getting trapped. Angels often get carried away by how smart the founder is, when the reality is that you don’t know enough about the space to be able to make a well-informed judgment. A bright idea does not usually translate into a successful business, especially when these are copy-cat companies!
There are many reasons why startups fail, and when they do, so will you. Most of these are outside your control, and there’s little you can do about this ( for example, when a competitor with much deeper pockets starts behaving irrationally, and buying customers using investor money), so don’t fret and fume needlessly.