It’s tempting to jump into angel investing when you hear of the track records of successful angels. But before you rush in, know that successful angels have refined their investing philosophy and process over time.
We work with leading angel investors daily and here’s what they recommend new angel investors focus on.
- Focus on the team and the market.
In any early-stage company, there are going to be glitches. And with early-stage technology companies, those glitches are going to be many and more frequent. So, rather than getting caught up with how far along a company is in terms of developing a flawless, market-ready product, focus on the market they are trying to enter and how the team will fit into that market.
Even when a company has a great principal backed by solid technology, if they’re entering into a market crowded with similar companies, the likelihood of a successful exit goes down unless they have something especially compelling. Also, make sure if it is a crowded space then the market needs to be large enough to support all of the contenders. The size of the market here is also imperative. Sometimes a smaller but uncontested market is very desirable. Ask the types of questions that will elicit responses relevant towards evaluating the startup. (Unsure what questions to ask? Use Propel(x)’s “6 Questions to Ask Management Teams” as a reference).
And do not forget an important yet frequently overlooked aspect of evaluating a startup: the team. What is their background, and why is this company and field important to them? A startup can only be as successful as the team’s passion and expertise. After all, once you invest, it’s up to them to use it wisely.
- Only invest the money you can afford to lose.
When you find a company that you really jive with, it can be tempting to put down the big bucks. But any seasoned angel investor will tell you that putting too many eggs in one basket will only lead to cracked shells.
The reality of angel investing is it is high risk and it’s extremely difficult to predict which companies will succeed and which will fail. Experienced angels combat this by only investing a portion of their funds into any given deal and diversifying. Propel(x) facilitates this practice by allowing angels to invest through a syndicate (for which the minimum investment is $3k.) Investing through a syndicate lowers the barrier for entry and allows you to build a more diversified investment portfolio.
- Invest time as well as money.
Malcolm Gladwell famously said it takes 10,000 hours to achieve mastery in any given pursuit. Angel investing is not a passive pursuit. To gain success, you have to be ready to commit time and effort into making your investment successful. This includes participating in the due diligence process and keeping up contact with the CEO to discuss updates and potential exits. When you sign a check, hour one begins–and it’s a long way to mastery. To read more about how to conduct a successful due diligence process, check out our series on the topic here.(link to first platform spotlight)
Success in the angel investing world is never guaranteed. But for those who are willing to committed to finding great deals and diversifying, it can also be extremely rewarding. And by adopting the habits of top angel investors, you too can start to see returns from the companies you’ve invested in.
To learn more about the fine points of angel investing, sign up for our five-part investing guide here.