The old joke in angel investing is that the best way to end up with $1Mln from a startup portfolio is to invest $5Mln.
It is therefore best to avoid this. So, just like it is critical to have a strategy when developing a startup, it is likewise critical for angel investors to have an investment strategy as a fundamental part of their investing journey.
Obvious as this sounds, most angel investors do not, at least at the start. They are confident that their business experience and acumen will be fit for purpose even if they are novice at early stage investing.
The ACA 2017 report confirms that most business angels have extensive business experience:
The ACA 2017 report includes a final sample of 1,659 US residents, ages 18+, who qualified as an accredited angel investor. The findings presented demonstrate that angels are created “organically” – that is, angels were, at one point, on the other side of the table as entrepreneurs themselves, and are therefore “local” and familiar with the entrepreneurship ecosystem.
This non strategy focussed attitude is what I term intuitive investing, that is, investing based on educated fundamental assessment of the attributes of the startup without a portfolio approach. This does not mean that these angels do not conduct due diligence prior to investing, nor does it mean that they do not join investor networks to improve their chances of meeting great startups, but fundamentally it means that they consider startups one at a time without any systematic approach to how they build their portfolio.
As we can see from the graph hereunder, the value add of being part of an angel group is known to most as a source of reliable deal.
To use the buzzword, these investors can indeed prove to be “smart money”, but what they are missing is their opportunity to optimise their value add, and as a result, their return on investment opportunity.
Being a systemic investor essentially means having a portfolio approach to angel investing and taking investment decisions based on an iterative strategy that evolves as you do as an investor.
In the below graph we can see that investors with most experience have nurtured relationships within the founder ecosystem as well as the co-investor ecosystem and use these human connections as their main deal flow resource as they build portfolios.
An investment strategy evolves in time to also consider:
The pathway to exit for the startup as a core component of each investment decision
do I have access and network reach to late stage investors, corporates or potential acquisition partners for startups I may choose to invest in?
What exit strategy are my co-investors considering for this deal?
What is my value add?
where is my deep level expertise where I can truly add value.
How does this combine with the lead investors attributes, can I be influential?
where do I find startups that match my portfolio strategy?
do I already have access to high potential startups or should I join a network or two to increase my reach
how do I find co-investors to compliment the skills and knowledge basis that I do not have
There are other aspects to angel investing that I did not delve into, mostly because they are personal attributes and change from person to person. These relate to things like value beyond financial returns, social responsibility and giving back. Angels also hold in high regards educational aspects of being involved with new technologies, business models and new ways of doing business. These are important and should not be undervalued whilst considering your personal strategy.
The business angels I have built relationships with, especially those that continue to invest after the first few attempts, tend to develop a strategy, mostly because they learn from past mistakes. After having seen hundreds of pitches and sat through hundreds of meetings, one starts to develop an in-depth appreciation of what makes a startup tick, and critically the types of individuals you personally want to deal with and invest in. Angel investment networks are highly connected mechanisms and angels like to hunt in packs. Its critical as an investor to develop a highly influential and highly reputable network if you want to get access to great deals.
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Appendix: What is the situation for business angels in Europe
My personal experience is that the European marketplace remains significantly fragmented.
Organisations such as EBAN and Business Angels Europe are trying to bring together key players from around the continent in order to address the impact of border lines, and EU wide initiatives like the Capital Markets Union action plan have "access to finance" as a key target area for Europe.
If you happen to be part of a business angel community with a cross-border mission statement, please do get in touch. It would be my great pleasure to learn about your investing experience. EBAN compile statistics for european angel activity taking place in 38 countries. These confirm that Europe still has a lot of work to do with regards to finding ways to allow angels to be truly cross border.
One of the initiatives I was mostly proud during my time at Go Beyond Investing was the Rising Tide Europe initiative which sought to challenge two fundamental issues in the European market: the lack of systematic cross-border investment opportunities and the limited access to market for female angel investors.
With the Rising Tide initiative now in its third edition, with each edition having circa 100 female participants, it is a pioneer in this space.
The final interesting statistic that emerged from the EBAN compendium is related to the ticket sizes invested by European angels on average:
With it being noted that most business angels have a local or at best regional investment interest, and the size of the tickets shown above, it seems that the role of business angels in Europe has remained that of assisting seed stage startups.
More needs to be done in order to have a marketplace for European startups to graduate through to a Series A and later rounds of venture capital. With the emergence of tools like Equity Crowdfunding and ICOs, access to seed stage capital is on the increase in Europe, but this wave needs to continue to gather momentum.
I would be very interested to delve into the early stage Venture Capital market scene in Europe as well as hold discussions with entities in the Corporate Venturing Arena to learn from first hand experiences. If anybody has access to compelling market reports, please do share them in the comments hereunder or get in touch directly with me.
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