Lessons Learned

June 13, 2018

Author: Dennis Ensing

What do new Angel investors most want to know?

“Will I be able to invest in the next Facebook?” Actually, this is not generally the first question I get from prospective members before they even attend one of our Investor Meetings. Their interest is not primarily in the investment returns they can expect from this asset class.

“Don’t most investments in this class fail?” No, neither are the risks that exist in seed stage investing an early topic of conversation, although invariably it eventually arises, as it should.

In fact, our members’ collective experience is the most common thing that our prospective or new Angel investing members want to learn more about. This article is a brief overview of what I share with them.

People

Even undergraduate business degree majors learn that the quality of management is a critical factor for successful execution. 60%, and some would say 80%, of an Angel’s decision about whether to invest in a particular new venture or not is based on their assessment of the management team. The reason is that, despite even the best laid plans, challenges will inevitably arise that require the team to adapt or pivot. And it may well take more than one pivot to end up with the right business model.

Passion

We have one member who likes to ask every presenter, “Why did you start this business?” He’s looking for the passion or drive that identifies the founder(s)’ motivations. Wanting to make a lot of money is never enough, because when the going gets tough, which it most definitely will, or it takes longer for them to make the money they hoped, they will bail unless there is a deeper seated purpose that will make them never give up.

Structure

SAFEs and convertible notes seem to be all the rage of entrepreneurs these days. Members in our group are not fans of notes and very much prefer equity financing. NACO has provided some innovation in financing documents that standardizes the documentation required to keep the cost of an equity-based financing in line with that of a convertible note, allowing founders to close on cash quickly and sequentially, and establish clean, fair terms for future financing rounds. Our view is that if the Angel investor(s) can agree with the founder on a valuation cap, agreeing on the simple terms for a plain vanilla equity financing shouldn’t be any harder, and aligns interests much better.

Portfolio Approach

Don’t put all your eggs in one basket! You should spread your allocation of this asset class of your portfolio into multiple investments so that if one goes wrong, you won’t lose all your cash. Studies also show that returns of 30-40% are possible in this class, but only when 8-10 or more investments are made.

Be Prepared to Follow on

Financially, many investments will also require more capital in the future, even if the founder doesn’t think that they will right now. Keep a good portion of cash available so that you can participate in follow on rounds as the opportunity arises and the business merits.

Be Involved

SWO Angels members do not make passive investments. Our members are successful business people who really enjoy bringing their expertise and connections to an opportunity together with their capital. We believe that the more time Angel investors spend on their investments, the more likely they will succeed. As well, one of the principal advantages of being in a group is being able to leverage your fellow members who have much to offer in additional insight and experience.