The other night I was speaking to a self-described angel. I asked the standard questions of “What have you invested in?” and teased out approximate answers for “how much, with how many others, when and tell me about the company?”.
The answers were shocking to me – he had invested in just one company, it was several years ago and for $100-200k only, and he had limited insights about the company. To me the person was not close to being an angel investor.
Which brings us to the question – what is an angel investor, and how do you know when you are one? The answer to me is threefold:
- You regularly invest your own money in startups, spending $50,000 to $2 million when you do so.
The evidence of this is a portfolio of investments, a track record of averaging 3 or more investments per year and the fact that the amounts you are spending are a small percentage of your personal or family net worth.
- You make very fast yet wise decisions based on very limited information.
The evidence of this is that you got in early into some very successful companies, everyone says you are very easy to deal with and that you are very quick to say either yes or no.
- You offer superb advice, at the outset and ongoing.
The evidence for this is that you understand and are connected in the industry, you are seen as a great and rapid judge of people and you have a very sharp strategic and business mind. Perhaps you don’t have all of these, but you are the go to person for what you are great at.
Now for some signs that you are not an angel investor, at least for how I define it:
- You only invest as part of an angel network
Network investors are almost all followers, and are not actively attracting deals, meeting the principals alone and making rapid decisions. Arguably the person in an angel group leading a deal is acting as an angel, but the remainder are not taking responsibility for the relationship and ongoing advice.
While an introduction service is nice for genuine angels, the vast majority of people in an angel network would be better off investing in a fund (VC or seed) as limited partners (without any control) and giving the mandate to a general partner who has the required skills. They are investors, not angels.
- You don’t have deal flow or a portfolio
Real angels have people continuously trying to contact them, asking for coffees, advice and money – usually in that order. These meetings are productive regardless of whether there is a funding result as the transfer of informations is quick (they ‘get it’) and their advice is so good. They will also be able to point to a few companies that they have invested in, some of which are successful and some not. These companies ill provide great references.
- You are a VC or seed fund firm
A VC or early stage investment firm has multiple funders and decision makers. This automatically makes it very hard for them to make rapid decisions. Even if a single General Partner has a mandate to spend, she must still consider the needs of investors and the timing and structure of each fund. The pitching process, internal research and paperwork can be onerous. These firms are best for later stage funding, helping you build on what you already have demonstrated is viable.
I see that great angels are also still active, either in your or other spheres. They may be still working in their main business, or taking a leadership role in one or more of their investments. The Angel investing is something they do on the side, and they invest a quantum of time into it that is sufficient but not overly large. They are great at picking people, pick up fast on ideas and excel at identifying the weaknesses and helping to address them, and they do this without being a burden to ‘manage’.
Being wealthy and making the occasional dabble into a company might sound like the ideal life for some, but I would argue that founders are better of delaying asking those sorts of investors for money until after the first one or two rounds.
It should be pretty obvious to readers of this blog who the active angels are in New Zealand. Take a look at Pacific Fibre’s shareholder register and you will see several of them, as you will if you look at companies that those shareholders in turn own. The long term champion is Stephen Tindall, who has invested in a huge string of companies. Some of them have, in hindsight, been awful, others great, and others like Lanzatech, incredible. The best decision was made at the time, and with every new investment comes more learning, and over time the run rate should go up.
The magic about angel investing is that not every bet has to pay off, and a lot of rapid ‘smart enough’ decisions allocating a small part of your net worth will almost certainly result in some breakout successes. But it’s not for everyone, and losing all of the value of your investments is always the highest probability event.