Angel Investing - Art Form & Team Sport
Angel investing is an asset class. When you read these words, what is the first thing that comes to mind? For most, it is probably something like “100x returns” (although for some angels it may be something along the lines of “illiquidity” or “risk of total loss”).
Angel investing is quite a flashy term, but it is also a loaded one. Most people associate it with unicorn-like returns, while in reality, 70% of startups fail. That is to say, many investments for angels will not pay off. And when an investment doesn’t pay off in this space, that means in most cases, you will lose ALL of your money. For this reason, significant collaboration and tenacity is required by angels for sourcing, diligencing and tracking these ventures.
So why do the thousands of angels in 300+ angel groups across the country continue to invest in startups? Is it because the potential returns are too immense to pass up or is there a method behind the madness that allows angels to “do it right”?
Our angels will tell you that while there are no easy investment picks from the start, there are indeed ways to mitigate risk and achieve impressive returns in the long run.
According to our 27 year veteran angel Stender Sweeney, the most important principle is a familiar one: “diversify, diversify, diversify!” Even after the most thorough diligencing, there is no surefire way to identify a winner at this early stage. Sometimes the seemingly most promising startups will fail. Sometimes the ventures that are perceived to have no chance end up creating and owning a new market entirely. For these reasons, Stender explains that his strategy is to invest a small amount in a large number of promising young ventures, and doing so after collaborating with other angels and performing collective due diligence.
One of the unique and telling features of angel investing is that “writing a check is just the beginning.” This type of investing is not passive. Instead, it should foster a positive and mutually beneficial relationship between the investor(s) and the entrepreneur(s). After investing, the angels’ job is not only to track their investment, but also serve as an advisor and source of support for the founding team.
For Stender, this support has been in the form of bringing on other angel investors to help raise necessary capital; helping to develop better governance solutions; offering access to other founders and colleagues who have solved similar problems; mediating a dispute between investors and management; helping ventures identify and secure outside mentors; and, on one occasion, pinch hitting as the interim CEO.
Pasadena Angels do not act alone in any of these cases. Rather, angel investors collaborate and participate together in funding a business. Then, in turn, form their own collective of sorts to become stewards of the company. They work together in situations like these, utilizing the skills and experience appropriate to the need, with the deal lead usually serving as the main point of contact between the angels and the entrepreneur.
Angel investing is a very exciting and dynamic space, supporting those who are creating many of the new jobs in our economy. When done right, it can be financially and holistically rewarding as well. While one article cannot sufficiently do it justice, we would love to continue the conversation with you further. If you have any questions about getting started with angel investing or seeking funding from Pasadena Angels, please feel free to email us at info@pasadenaangels.com. Additional resources can be found at our website www.pasadenaangels.com as well as at www.angelcapitalassociation.org. We are also happy to help you find the right books and blogs for further details.
