Angel

1. Angel Investing: High-Risk, High-Reward Game of Startup Funding

"No gamble, no future."

High stakes, high returns. Angel investing is the act of putting money into the earliest investment rounds of a private business, typically less than three years old, with little to no traction. It's a high-risk, high-reward game where investors aim to get back much more money than they put in. The potential returns far exceed those of safer, more established investment vehicles.

Odds and strategy. The mortality rate for startups is between 70-90%, making angel investing riskier than playing table games in Vegas. However, if a startup becomes a "unicorn" (valued at $1 billion or more), the returns can be life-changing. The key is to invest in multiple startups, diversifying your portfolio to increase your chances of hitting a home run.

• Typical investment: $25,000-$100,000 per startup
• Goal: Invest in 50+ startups over 3-5 years
• Expected outcome: 80% may fail, but one big win can make up for all losses

2. The Silicon Valley Advantage: Where Innovation Thrives

"The world is becoming controlled by the few, powerful, and clever people who know how to create those robots, or how to design the software and the tablet on which you're reading this."

Innovation epicenter. Silicon Valley has emerged as the driving force in technology, media, transportation, advertising, health, and lodging. It's the center of the startup universe, with a unique ecosystem that fosters innovation and growth.

Network effect. The concentration of talent, capital, and resources in Silicon Valley creates a powerful network effect. This ecosystem includes:

• Investors (angels, incubators, and venture capitalists)
• Founders
• Service providers (colleges, lawyers, headhunters, and banks)
• Talent pool (developers, designers, and marketers)

The synergy between these elements makes Silicon Valley the ideal place for startups to thrive and for angel investors to find the next big thing.

3. Founder Assessment: Identifying Billion-Dollar Potential

"I don't need to know if your idea is going to succeed, I need to know if you are."

Founder-centric approach. When evaluating startups, focus on the founders rather than just the idea or market. Great founders can pivot and adapt, turning even mediocre ideas into successful businesses.

Key founder traits:

• Passion and commitment to their vision
• Ability to execute and solve problems
• Resilience in the face of challenges
• Strong communication skills
• Capacity to attract talent and resources

Assessment techniques:

• Ask probing questions about their background and motivations
• Observe how they handle pressure and unexpected situations
• Evaluate their ability to articulate their vision and strategy
• Assess their track record and references from previous ventures or employers

4. Due Diligence: Separating Fact from Fiction in Startup Pitches

"All relationships that start with lies will end in tears."

Verify claims. Conduct thorough due diligence to validate the information provided by founders. This process helps separate genuine opportunities from over-hyped or fraudulent pitches.

Key areas to investigate:

• Customer traction and revenue claims
• Team composition and experience
• Market size and competitive landscape
• Intellectual property and technological advantages
• Financial projections and burn rate

Red flags:

• Inconsistent or exaggerated metrics
• Reluctance to provide detailed information
• Lack of clarity on how funds will be used
• Unrealistic valuation expectations

Always cross-reference information with multiple sources and don't hesitate to ask for supporting documentation.

5. Building Your Angel Portfolio: Diversification and Strategy

"If you can't tell who the sucker at the poker table is, it's you, so find another table or figure out how to be better than each of the other players."

Diversification is key. To succeed in angel investing, build a diverse portfolio of startups across different sectors and stages. This approach helps mitigate risk and increases your chances of hitting a big winner.

Portfolio strategy:

• Invest in 50+ startups over 3-5 years
• Allocate 5-20% of your net worth to angel investing
• Start with smaller investments ($1,000-$2,500) in syndicate deals to learn
• Graduate to larger investments ($25,000+) as you gain experience
• Reserve capital for follow-on investments in your best-performing startups

Investment thesis: Develop a clear investment thesis based on your expertise, interests, and market trends. This will help you focus on areas where you can add value beyond just capital.

6. The Art of the Deal: Valuation, Pro Rata, and Term Sheets

"Pro rata rights are a must and you should never do a deal without them."

Valuation matters. Understanding and negotiating startup valuations is crucial. While early-stage valuations are often more art than science, they set the baseline for future rounds and your potential returns.

Key deal terms:

• Pro rata rights: The ability to maintain your ownership percentage in future rounds
• Information rights: Access to key metrics and financial information
• Board seats or observer rights: Formal involvement in company governance
• Liquidation preferences: Priority in receiving returns during an exit event

Negotiation tactics:

• Ask founders how they arrived at their valuation
• Compare with similar startups at the same stage
• Be willing to walk away from overvalued deals
• Consider offering value-add services to justify better terms

7. Navigating the Startup Lifecycle: From Seed to Exit

"Starting companies is really easy, but finishing them—by having an exit—is really hard."

Understand the journey. Startups go through several stages from inception to exit, each with its own challenges and opportunities for investors.

Startup lifecycle stages:

1. Seed stage: Idea validation and initial product development
2. Early stage: Product-market fit and initial traction
3. Growth stage: Scaling user base and revenue
4. Late stage: Preparing for exit (IPO or acquisition)

Investor role evolution:

• Early stages: Provide guidance, connections, and support
• Later stages: Help with strategic decisions and preparing for exit

Be prepared for the long haul, as successful exits often take 7-10 years or more.

8. Communication is Key: The Importance of Startup Updates

"If a startup isn't sending you monthly investor updates, it's going out of business."

Stay informed. Regular updates from startups are crucial for angel investors to track progress, identify potential issues, and provide timely support.

Effective update structure:

• Key metrics and KPIs
• Recent achievements and milestones
• Challenges and how they're being addressed
• Runway and funding needs
• Specific requests for investor help

Investor response:

• Acknowledge and provide feedback on updates
• Offer help and connections where relevant
• Flag concerns early to address potential issues
• Use updates to inform follow-on investment decisions

Encourage founders to maintain consistent communication, even when things aren't going well.

9. Weathering the Storm: Dealing with Failure and Maintaining Perspective

"Life is short. Loyalty is all about intent. So if you're not loyal to your angels, you're an unworthy idiot or brilliant narcissist. Either way, go fuck yourself."

Expect setbacks. Angel investing involves frequent failures, especially in the early years. Developing resilience and maintaining a long-term perspective is crucial for success.

Coping strategies:

• Focus on learning from failures
• Celebrate small wins and progress
• Maintain a diversified portfolio to balance losses
• Build a support network of fellow investors
• Remember that one big win can make up for many losses

Long-term mindset: Think of angel investing as a decade-long pursuit. Early losses are part of the learning process and can lead to better decision-making in the future.

10. The Exit Strategy: IPOs, Acquisitions, and Cashing Out

"Great companies are bought, not sold."

Understand exit options. The ultimate goal of angel investing is to achieve a profitable exit. This can happen through various means, each with its own considerations.

Exit types:

1. IPO (Initial Public Offering): The holy grail of exits, but rare
2. Acquisition: More common, can range from acquihires to premium sales
3. Secondary market sales: Selling shares privately before a public exit

Exit considerations:

• Timing: Balancing potential future growth vs. securing returns
• Diversification: Consider selling portions of your stake over time
• Tax implications: Consult with financial advisors on optimal exit strategies
• Future potential: Evaluate the acquiring company's ability to scale the startup

Remember that the best exits often come from companies that aren't actively seeking to be sold but are attractive acquisition targets due to their success.

Last updated: July 28, 2024