Angel Investing: Start with a Plan
Before you dive into angel investing, first determine how you want to approach it.
As I wrote in my previous post, personal angel investing can be an attractive stepping stone for career progression as a venture capitalist - a way to break free from the constraints of the “Jr. VC Catch 22” (when you're not empowered to lead an investment without prior experience, but can't get experience without leading an investment). However, this path is not without its challenges. Of course, angel investing has an allure that could be challenging to resist - the thrill & freedom of making an investment decision yourself, the potential of being part of the next big thing, and the chance to build your personal track record. Not to mention the potential for a big payday down the road.
But before you start draining your bank account to write checks, do what most angel investors don’t do: act like a VC GP, and start with a plan.
I can’t tell you how many angel investors I’ve met over the course of my career, all the way from hobbyists to investment professionals in other realms, stumble into having assembled a set of angel investments without much prior thought or organization. The result is often a “portfolio” of different sized checks into a hodge-podge of different companies without much rhyme or reason.
However, there is a reason that professional investors devote serious thought to the concept of portfolio construction. First recognizing then ranking the goals of angel investment activity informs a strategy about how many investments to make, how often, and what they should look like.
The first step, of course, is to determine a budget. It doesn’t matter if that total amount is five figures, six, or more… treating a set of angel investments like a fund will provide a framework for the rest of the planning exercise. Once you've set your budget, think about how many investments you want to make over a certain timeframe and the resulting sizing of each check. Are you expecting to make a few large investments, or would you prefer to be more prolific with a larger number of smaller ones? Without this expectation, you risk either overcommitting or undercommitting to your early investments, which could lead to an unbalanced portfolio. Lastly, estimate how long you want this capital to last to determine expected pacing. Of course, as my partner Lee always reminds us here at NextView, “there is no quota in VC,” meaning there should never be any pressure to invest unless you have sincere excitement about an opportunity. Yet understanding expected pacing helps inform if you’re investing way too quickly or instead need to re-energize your efforts if you plan to meet you overall goals.
There are also potential non-financial and non-quantitative considerations about assembling an angel portfolio. The result inevitably will be body of work that reflects a set of investments into companies at specific stages, sectors, founder profiles, etc. Hopefully it also will reflect situations where you have an unfair advantage, either because of domain expertise, unique relationship, or ability to help. For non-partner VCs making strategic angel investments, you can build a portfolio of direct relationships with founders and companies, unmediated by your employer firm, which can eventually aid your career development. This illustration of your investment access and thinking can be a powerful tool when you're looking for your next role or in raising your own fund down the road. It can become tangible manifestation of your viability as an investor, which can speak louder than any resume points. As I’ve warned previously, however, angel investing outside the realm of your VC employer can also be a career hazard if not approached correctly.
In a good way, a deliberately planned approach can be taken to an extreme in resembling a pseudo-VC firm. I do know of a set of a dozen rising VCs who’ve pooled their own capital, created an LLC entity as a mini-fund, and make decisions as a group to invest in startups with small $10K checks in deals which couldn’t get done in their own firms for whatever strategic or political reasons. When I’ve chatted with one of them about this ongoing experience, she’s relayed that the greatest benefit of this exercise isn’t the forthcoming financial return or even the body of work cited above. Rather the greatest benefit of angel investing as a group has been the actual learning going through an investment process with partners as true principals. In the end, isn’t that what we’re all (myself included) striving to become, better investors?
A final recommendation about your angel investing plan: commit and follow through. If you experience an early win, resist the temptation to accelerate the pace or use the house money for larger checks. More likely, don’t falter when one of those first few investments sours. Lemons ripen first. Remember the power law of venture capital, as you don’t want failure on your third investment preventing you from making that exceptional eventual eleventh investment. After all, you started with a plan. Stick to it and you should be rewarded if you did it right.