The Truth about Angel Investing (Part II)
Getting Started
Angel Thoughts
What follows is a members-only post for Vertical members where we discuss trends, thoughts, lessons, best-practices, and other entertaining nonsense about angel investing. Since our members sit at the intersection of technology and real estate, we are always trying to learn about what is happening at the earliest-stage of startup investing.
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As we discussed last week, there are many misconceptions and false beliefs about what angel investing is and what it should be.
This week, let’s dive in to how to get started with angel investing before we move on to best practices and a few predictions.
First, it’s important to know the SEC definition of Accredited Investor. I am copying it here:
(5) Any natural person whose individual net worth, or joint net worth with that person's spouse, exceeds $1,000,000.
(A) The person's primary residence shall not be included as an asset;
(6) Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;
If that describes you, read on.
If not, find a group of angels or angel investor to get close to until you qualify. Some of the angel groups with the best reputations are Hyde Park Angels, Golden Seeds, Keiretsu, and a few others. In the real estate tech space, my group is always looking for help on research and analysis and I’m sure this one is the same. Learn as much as you can, help for free, and track your net worth until you qualify. I’m sure it’s just a matter of time!
If you are accredited (and that definition should be changing soon), there are a few ways to plug in.
First, think.
That’s right. Don’t jump on AngelList and start networking your brains out at meetups and pitch competitions.
Just think.
Where can you help? Where can you add the most value to a startup? Where is your passion?
Too many angels fall in love with charismatic founders and end up losing all their money chasing sexy projects that have nothing in common.
Pick a niche. Pick a theme. Become and expert. And you’ll see (and help) the winners.
If you are in real estate and spend even a single minute investing in medical devices or EdTech startups, I have very little sympathy for you when you lose all your money.
You were undisciplined and it bit you. It always does . . . eventually.
Once you have a few niches and theses, narrow it down to two. I would say one, but I know you (and me) better.
Ideally, one should be the focus of your day job (i.e. you work in real estate and you invest in real estate tech) so that you have constantly improving and nuanced views on the industry and its players.
Next, write out a few predictions.
Physically (paper or typing) write out at least three non-obvious trends that are headed for your industry/niche in the next 5 to 7 years. Weave in consumer behavior, advances in technology, and cross-industry innovation. Be specific and be bold.
They can be as broad or as narrow as you want and should be based on that industry and thesis you just formed.
Maybe in CRE mine could be:
Office work will decline by 50% in the next 5 years and we need to find solutions for that newly-available space.
Apartments and office will merge into the same buildings in the next 7 years and that will pose huge logistical challenges to building owners/managers.
Drones and Robots will do 75% of the cleaning of commercial indoors and outdoors in the next 7 years.
In the long run, I don’t really care if these predictions are correct. I care that you go through the exercise of anticipating where the industry is headed.
Forecasting and thesis-building is a muscle. Start exercising it and it will get stronger as you grow your portfolio.
Now, you are finally ready to get on AngelList. For better or worse, it’s where Silicon Valley invests (on the side) in startups and it’s partially because many of them semi-worship its founder, Naval. Once you are on, you can start sorting by deal stage, geography, or a host of other criteria.
AngelList is probably your home base until/if you join a group. Use it to explore companies, other investors, syndicates, funds, and rolling funds. (For purposes of this article, I assume you can figure out what each of those are. If not, hit me up.)
After a few weeks of digging in to AL along the lines of your niche and thesis, do some math or talk to your financial advisor. (Note - I am not a financial advisor and am NOT giving you investment advice. CONSULT YOUR OWN ADVISOR!) You need to determine how much of your liquid assets you should invest into startups.
Startups are extremely risky and 9 out of 10 eventually fail and return $0.
Get comfortable with that math.
You probably won’t make money investing in startups.
You probably won’t make money investing in startups.
You probably won’t make money investing in startups.
(And you should still do it.)
Most wealth managers and financial advisors I know recommend between 2% and 5% of investable assets in risky alternatives like startups. Ask them yourself.
Another interesting way to think about it is simple loss vs reward. The question to ask is “How much could I lose and not really miss it but if it went 50x it might change my life?” That’s probably the right amount. But, again, ask a professional!
Once you have your theses/niche, you understand AngelList, and have your number, you are ready to go.
Dig into deals you like, perform your own diligence, get involved as necessary, and, most of all, LEARN. These founders are the smartest and most creative people on this planet. They are quite literally redefining businesses and entire industries. Pay attention to how and why they do things. They aren’t always right, but man are they creative.
One final thought: If you are determined to actually make money on angel investing, I have only found one path for it (other than getting lucky):
Join a group.
The best angel groups are exceptionally gifted at sourcing, diligence, support, and simple best practices. Having peers to kick around deals and data, formal diligence, formal investing processes, and actual theses to pursue is wildly more effective in the long run than simply solo investing.
Much like any investment category, startup investing is much more effective when you have peers who can help and co-invest.
As I have written before, most angel groups are not going to fit that category. Too many are bored retirees with no real hunger for hustle and disruption. But, every so often, there are great groups out there who are best-in-market and really do have thoughtful processes.
You should expect to pay to be a member of the group and expect to be held accountable for your behavior and investments (that’s kinda the point).
Other than that, have at it and have fun.
I’ll get in to some best practices in Part III.