9 Tips All First-Time Angels Should Know Before Investing

February 4, 2020

First-time angel investors should know what they’re getting themselves into before writing any checks.

By Young Entrepreneur Council

So you want to invest a promising startup that you believe could have unicorn potential. Before you sign that check, however, think about what your new role as an angel investor will entail: are you investing solo, or joining an angel group in order to mitigate risk? Consider the implications and establish some ground rules before you go all in on that investment.

Below, nine entrepreneurs from Young Entrepreneur Council (YEC) offer their advice — from pitfalls to beware of to best practices to follow — for those considering adding the title of “angel investor” to their resume.

1. Don’t put it all in one place

You need to have an idea of how much you are going to invest. Meanwhile, you should have a pool of money reserved before making an investment so you have another chance to invest if your initial investment is growing fairly well.–Kevin Xu, Mebo International

2. Establish the limits of your relationship early

The biggest source of drama when working with angel investors is the level of influence they expect to have in the company. It’s tough enough when angels with no experience in business demand a lot of executive control, but it’s worse when the control isn’t well-defined. That’s something you need to be clear on not just with them, but with yourself. Changing the parameters of when, how and to what extent you’ll interfere will make a relationship go sour faster than anything else. So spell that out the first time you meet, and spell it out as clearly as you can in every single contract and document. Even speaking from the other side, I can say that angels deserve the right to protect their investment, but not all of them are as qualified to do that as they imagine they are.–Adam Steele, The Magistrate

3. Develop a personal investment thesis

Angel investors need to define their personal investment thesis on the front end. The thesis serves as a decision-making guide for which deals they should or should not invest in. As part of that thesis, the angel needs to think about five things: what type of return they are seeking: a return on investment, return on involvement, or both; whether the angel wants to invest in what they know industry wise or whether they are looking for diversity; how much money they wish to deploy over what period of time and into what number of companies; whether they wish to reserve money for follow-on rounds (advisable but not required); and what level of reporting and involvement is desired from the companies to make sure the investor is upfront with potential prospects.–Eric Mathews, Start Co.

4. Invest with others

It can be very risky to invest on your own for reasons including cognitive bias, being 100 percent on the hook financially, and not having access to the experience that other investors might be able to provide on the deal. By working with other investors, you can put your heads together to truly evaluate the opportunity and make the best investment possible. As a lone investor, it’s really easy to get caught up investing in friends or other opportunities in which you don’t understand all the potential implications of the deal today or in the future. They always say that “two heads are better than one.”–Andy Karuza, brandbuddee

5. Think in 10-year horizons

Software startups take seven years on average to grow from its first VC investment to an IPO. As an angel investor, you might be investing years ahead of that first VC investment. Be prepared to be locked into each investment for a decade or more. Only invest money that you don’t need.–Neil Thanedar, LabDoor

6. Invest in what you know

When it comes to investing, I stick to the same mindset as Peter Lynch of the Magellan Fun at Fidelity Investments. He says to “invest in what you know.” When investing in something, you are more likely to make smarter choices if you are in a business you know and understand.–Jayna Cooke, EVENTup

7. Save Monday for pro rata

Successful investing is about doubling down on the companies that are doing well. In order to do this, you need to reserve some cash to invest your “pro rata” in a company’s next round — this allows you to maintain your percentage ownership. For example, if you invested $25,000 at a 2.5 million valuation, you’ll own 1 percent of the company. If the company’s next round is valued at 10 million, you’ll want to invest enough to maintain your 1 percent ownership.–Bhavin Parikh, Magoosh Inc

8. Invest in people

When you’re looking to invest early in companies, you aren’t investing in products, you’re investing in the founders. The product will change many times over the course of the business lifecycle, which is why the founders will need to be passionate, skillful and motivated enough to stick to a mission. Ask yourself: Can this team pull it off? Can they work in stressful situations? Are they in it for the long haul? Have they had past successes? Do they get along outside of the office? Have they known each other for a long time? Are they experienced in the field? Can I offer value to them? Would they get along with me? If you answered no to any of these questions, you should reexamine the investment opportunity.–Scott Weiner, ClosingBell

9. Don’t invest just money

When you start out as an angel investor, the tendency is to focus on the money. However, if you’re an experienced professional in your field, you can take the business much further by investing your time and knowledge as well. In addition to investing financially, help your companies with time management, best practices for the industry, skills management, any tips on automation, and any other business advice you may have. Teaching a startup how to run their business more efficiently is better than throwing money at them until they figure it out or spend it all. You can also help them by connecting them with your professional network and guiding them with important business decisions.–Dave Nevogt, Hubstaff.com

The opinions expressed here by Inc.com columnists are their own, not those of AIN.


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