Investing as an angel may be a very profitable and pleasurable experience.
You get the opportunity to meet entrepreneurs who are chasing their ambitions and establishing enterprises with the potential to transform the world, sometimes at great personal risk. Even better, you become a little part of that thrilling trip when you write a check.
Despite Covid-19 and the economic turmoil it has caused, the angel market in the UK and throughout Europe seems to have remained thriving, which might be a reflection of how much angels like what they do. Indeed, as more founders successfully depart their businesses, a new generation of investors is entering the market. This is great news for anybody wishing to invest in early-stage companies.
If you’re thinking of writing some angel checks, here are 10 essential rules gleaned from a decade of angel investing.
Tip 1: Decide on your strategy before you begin investing.
As an angel investor, you must have a plan and strategy in place before making your first investment.
It doesn’t have to be complicated, but it must have the necessary elements. It should include details such as:
• Time commitment: do you have enough spare time to invest in angels? Will you be more of an armchair investor or a hands-on investment?
• Investment strategy: will you focus on a certain industry, technology, or functional area?
• Trying to find a deal: how are you going to create business? Will you seek them out on your own or will you join a syndicate to profit from other people’s deals?
• Your angel investment: how much angel money will you put in, and for how long? Do you intend to set aside any funds for future rounds?
• Deal size: do you have to aim for larger deals as a major investor or smaller ones as a co-investor?
• Portfolio diversification: how many transactions do you want to make with your available funds? A minimum of 10 agreements is required for optimum portfolio variety.
Tip 2: Storytelling, Startups, and Planning
The narrative behind your company concept is just as important as the financials and stats in your business plan. What inspired you to start your business, what is your passion, and where are you in your journey? What is the best way to explain this, and why is it so important?
Startup founders have a lot on their plates, but the most crucial task is to explain the narrative of their concept or enterprise. Viable co-founders or employees, consumers and partners, investors (Angel Investor/ Venture Capitalist), advisors, and collaborators are all potential audiences to interact with.
Tip 3: Market size and growth must be substantial.
For startups, market size and growth are critical. Even if a firm outperforms its competition, it may not be able to scale up due to its narrow focus. The greatest firms to invest in have strong metrics and significant market expertise. Important indicators include ARR (annual recurring revenue), MRR (monthly recurring revenue), and TAM (total addressable market).
For the firm to create a consistent stream of ARR, it is critical to ensure that the product has a continuing and considerable market demand. The growth rates of growing organizations are typically proportional to their size, industry, and nation. Companies of any size, sector, or nation may utilize growth rates as a reference to estimating revenue.
Tip 4: Have a well-defined and well-documented screening procedure.
If you move ahead with Angel Investment, a slew of possible transactions will be sent your way. The trouble is that you’ll be inundated with pitch decks from everyone attempting to sell you stuff. Without a defined and recorded screening procedure, there is a danger of drowning in pitches. When selecting whether or not to pursue a new opportunity, it is advisable to use an initial filter.
1. What can I do to make a good difference in this company?
2. Is this investment aligned with the priority areas I wish to invest in?
3. Does anybody have a clear claim to victory?
4. Do I have faith in the founding team?
5. Do I think this is a winner?
Because of my politeness, I will not proceed until I am provided with an investment idea that has a significant technical component as well as a firm that has the potential to have a global effect. You should undertake rigorous due diligence and interview the founders of any assets that pass the first screening.
Tip 5: Make an offering.
Anyone with extra cash may become an angel investor, but if you don’t offer value to the firm you invest in, you’ll be branded “dumb money.” Some individuals choose to be passive angel investors; however, you need assist your founders in order for the ecosystem to work effectively. Starting to help founders before investing is an excellent method to build a good reputation. Ensure that you’re offering the proper amount of aid without being pushy or disruptive at the same time.
Tip 6: Pay close attention to your teammates.
Examining the firm’s other investors and evaluating if it has a strong staff are two approaches to learn more about it. Even the most certain thing may go wrong if the team isn’t committed to getting it off the ground.
Examine the histories and industry capabilities of the founders and team, and check whether they’ve previously established comparable businesses or products. The firm will be able to adapt to market developments if they arise if it has strong personnel.
Venture Capitalist with previous knowledge in the startup’s sector may also be useful. You’ll be able to make informed judgments about a startup’s future prospects in this manner.
Tip 7: Team up with other angel investors to invest.
It may be a lot simpler to invest with other like-minded investors, in addition to the pleasure and advantages of developing your investing network. When you join an angel syndicate or locate an angel group, you may co-invest and learn alongside others who have expertise in your sector. Being able to ask active angel investors questions in order to have a better grasp of their investing strategy.
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When analysing start-ups, having a new perspective is also beneficial. You may use them to either test or modify your ideas. The last benefit of partnering with other angel investors is that you are not responsible for the full investment. That is to say, you do not have to pay them all at once. This is particularly useful if you’re just starting out as an angel investor with a little amount of money.
Tip 8: Do your (technological) homework.
Be harsh while analysing technologies. It’s not necessary to look through the coding to validate your main assumptions about what technology is meant to perform. Check out the app store reviews, see live demonstrations, and talk to the CTO (not the CEO). Learn about the engineering culture at the organization and how the technology is doing. If you’re not sure how to accomplish it, you may talk to other angel investors who have done it before.
Tip 9: Support the entrepreneur, not the company.
Based on their founder and founding team, early-stage organizations may be able to tell the difference between success and failure. As a result, you invest just as much in the founder as you do in the business. You’ll want to evaluate the founding team as one of the many phases in the investment screening process. Here are some things to keep an eye out for:
1) A charismatic personality
Look for entrepreneurs that are really enthusiastic about their business and who are driven to succeed. This attribute enables leaders to make tough choices and persevere in the face of hardship.
2) Commercially minded
The most successful entrepreneurs are laser-focused on driving the company’s core KPIs and have a clear go-to-market plan.
3) Relevant job experience or a track record of success
Founders that have extensive knowledge of their industry or company field are more likely to succeed. As an Angel Investor, you must consider their prior initiatives and how successful they were before making a selection.
Tip 10: Recognize entrenched interests.
Respectable go-to-market strategies are essential for a credible company, but they demand their own debate. By failing to recognize or underestimate a vested interest (particularly when the founders lack topic competence), a firm might be destroyed. One of the most well-known instances is marketplaces, however this may happen in a variety of business types. If all of the stakeholders in the market have longstanding and entrenched ties, a model geared at removing intermediaries or improving efficiency would face strong pushback. These forces are usually quite strong, although this isn’t always the case.
Additionally, your company will need a complete business strategy in order to get funding from financial institutions.
You may also utilize an angel to help your firm get momentum. Angels may help you expand your market by acting as sounding boards for your ideas. Finding the right angel investor at the appropriate moment may make a huge impact in your company.