editione1.0.1Updated September 19, 2022
You’re reading an excerpt of Angel Investing: Start to Finish, a book by Joe Wallin and Pete Baltaxe. It is the most comprehensive practical and legal guide available, written to help investors and entrepreneurs avoid making expensive mistakes. Purchase the book to support the authors and the ad-free Holloway reading experience. You get instant digital access, commentary and future updates, and a high-quality PDF download.
While there are many risks to angel investing, the rewards, both financial and personal, are real. If you like spending time with entrepreneurs and learning about new technologies and methods, if you want a ringside seat at the ongoing disruption of industries, if you want to flex your knowledge and experience, or if you want the chance to make an impact, angel investing can be fun, educational, and exciting.
Maybe you bought this book after reading that Peter Thiel made a billion dollars from Facebook out of a $500K investment.* You might even have friends who invested $25K in a business to see it return 18 times that amount. But beware—the majority of angel investments return nothing to investors.
As a benchmark for purely financial return, large portfolios of well-screened angel investments either aggregated by so-called “super angels” or across active angel investing groups can generate internal rates of return of 20% or more.
If you have a large investment portfolio, angel investing can provide diversification, as it represents another asset class. But it is high risk and requires patient capital. Your investment advisor may be able to provide you with suggestions on what proportion of your overall portfolio to allocate to private, early-stage deals.
caution Because angel investments are extremely risky and illiquid, the common wisdom is that you should not invest more than 10% of your assets in angel investments, and you should be able to withstand the loss of all of that money.
Many angel investors are successful entrepreneurs or business people who have benefited from the mentoring of others and now want to give back to the entrepreneur community. You might have knowledge and experience that you want to share with the next generation of doers. That might be general management wisdom, industry specific knowledge (domain expertise), or functional expertise in marketing, business development, or technology. Angel investing frequently involves mentoring or advising founders of companies, so you will have ample opportunity to share your knowledge.
important Entrepreneurs want to change the world; angels can make that possible. Your investment could help bring a new medical device to market, help people stop smoking with a mobile app, increase food safety with organic blockchain barcodes, reduce food waste with AI-driven produce inventory management systems, or make the great American game of football safer with impact-reducing helmets.
Explicitly mission-driven investments aren’t the only path to making a positive impact as an angel. You could help create new social media marketing tools for small businesses, support building a social network for grade school kids, bring an end to the paper business card, make trucking more efficient for truckers, or create augmented reality video game platforms. Whatever the industry, your investment may lead to the development of a company that employs thousands of workers at good wages.
Angel investing is a unique experience, and the field is constantly changing. There are a lot of smart, creative, highly motivated people involved, not just building new technologies and companies, but also building new financial legal innovations (such as SAFEs and revenue loans). There is also increasing activity around combining mission-driven startups with angel investing and mentoring, where as an angel investor you can become a force multiplier for good. Fledge is an example of a conscious company accelerator that mentors both angels and startups focused on social good.
Being an angel investor is a meaningful way to get involved in your community and to meet other successful business people. Angels love talking about startups and technology and industry trends. As you participate in the angel investing community you will have the opportunity to get to know the local startup incubators, accelerators, and venture capitalists, and to generally participate in your area’s startup ecosystem. If you have time on your hands, helping to grow your local startup ecosystem can be a very rewarding way to spend your time.
As an angel investor, you will hear a lot of company pitches, and review many slide decks. Each company presents a unique learning opportunity, and you will get insight into industries you didn’t even know existed.
If you focus your investing in a specific domain or industry, you can gain insight into the trends and technologies that are going to be impacting that industry. How are new technologies getting applied, how might related industries get disrupted? When you hear how someone is thinking differently about customer acquisition or service levels or product delivery in a related industry, there is often something you can learn that might be applicable to a business you’re involved in.
By talking with entrepreneurs and following startups you will learn about the general processes, tools, and techniques enabling companies to quickly build and test products, inexpensively acquire customers, and the metrics they watch to manage their businesses. If you do not have it already, you will acquire a respect for how difficult it is for someone to build a company from nothing.
Angel investing will test your business acumen, ability to judge character, negotiation skills, research skills, intuition, and discipline. Many of these skills are put to the test in the due diligence phase. If you make some investments, you will have the opportunity to learn from your wins and your losses.
Angel investing is exciting. Have you invested in the next Facebook? Will your friends envy your foresight? Will you kick yourself for passing on a deal that would have made you spectacularly wealthy, or on an idea that could have improved people’s lives?
Part of the fun of angel investing is following the progress of the companies in your portfolio. It is a ticket to the emotional rollercoaster of the entrepreneur—the excitement of the big customer deal, the disappointment of the partnership that got away, the thrill of the payout from an acquisition, or the sting of one of your companies shutting down and winding up.
Angel investing can be challenging for a number of reasons. It can be time consuming and may require you to quickly come up to speed on industries or technologies you know little about. It can involve negotiating investment terms and dealing with unfamiliar legal issues. Additionally, once you invest you may have very little insight into what is happening to your investment and very little (if any) control over what the company does. You will also be impacted by the rights and valuations the company negotiates with any follow-on investors, which can have a dramatic impact on your return. The goal of this book in part is to help you understand the legal issues, deal terms, rights, and limited controls that will have an impact on your outcomes. Ultimately an angel investment is a gamble, and your goal is to try to increase your odds of winning before you place your bet.
Angel investing can be time consuming if you are actively involved in selecting your investments. A typical active angel investor may see 50–100 investment opportunities in a year. They attend angel group meetings, meet with individual entrepreneurs who reach out to them, and see deals from within their network of other angels. They may be interested enough to look into ten of those deals and engage in serious due diligence on a handful or more. On the deals they decide to move forward with, they will spend time negotiating terms and reviewing legal documents. All that work might result in three or four investments in a year.