Angel investing in startups is probably the most challenging form of investing there is. Having been involved with the Tech Coast Angels for the last 10 years I have seen 150+ companies funded and very few successes. One thing I have learned over that time is that about 90% of the investors in each company "didn't know what they didn't know". Why? Unless you are a full-time investor looking at business plans all day long or have some particular domain expertise, angel investing will turn into a charitable tax exercise for you.
Successful angel investments usually had these top 10 elements going for them:
- Investors had to earn their right to be part of the investor syndicate and invest
- Investor syndicates typically had less than 5 investors investing $50K-$250K each
- The investor syndicate only had domain experts in the deal
- All investors contributed contacts, industry knowledge, or competitive intelligence
- The investment was sourced through contacts and NOT blindly through random submissions
- Sophisticated angels (like VCs) had looked at many other competitors from around the U.S.
- The valuation was never an issue in negotiations and was understood by both parties
- The market was in a recession and lacked institutional Venture Capital competition
- The management team had worked on previous start-up successes and failures
- The company had bootstrapped itself into a beta product and had to pay customers
Many angel investors may lack awareness or understanding of certain aspects of the investment landscape or specific industries. While it is true that angel investors, like any other group of individuals, may have knowledge gaps or areas of limited expertise, it's important to note that angel investors can bring valuable insights and experience to early-stage investments. Here are a few points to consider:
Diverse Backgrounds: Angel investors come from various professional backgrounds and industries. While they may not be experts in every domain, their diverse experiences can provide unique perspectives and insights. They often bring expertise from their own industries or successful entrepreneurial ventures, which can be valuable in evaluating startups.
Learning and Continuous Improvement: Angel investors, like any investor, should strive to continually learn and expand their knowledge base. Successful angel investors recognize the importance of staying informed about industry trends, market dynamics, and emerging technologies. They often engage in networking, attend industry events, and seek advice from mentors and experts to enhance their understanding.
Collaborative Approach: Angel investors often collaborate with other investors and industry experts during due diligence and investment decision-making processes. This collaboration allows them to leverage the collective knowledge and expertise of a group, mitigating individual knowledge gaps and increasing the chances of making informed investment decisions.
Subject Matter Experts: While angel investors may not be experts in every area, they often seek advice from professionals, mentors, or industry experts who possess specialized knowledge. They may bring on board advisors or consultants with expertise in specific industries or technologies to complement their own skills and enhance their investment decisions.
Learning from Failures and Successes: Angel investors gain insights through their past experiences, both successes and failures. By reflecting on their investment track record, they can learn valuable lessons and refine their investment strategies. This iterative learning process helps angel investors become more knowledgeable and informed over time.
It's important to recognize that while angel investors may not know everything, their participation in early-stage investments brings valuable financial resources, industry experience, and networks to startups. The key is for angel investors to be open to learning, seek expertise where needed, and engage in continuous improvement to make informed investment decisions. Similarly, entrepreneurs should actively seek out angel investors who align with their industry and domain expertise to receive the most value and support.