05 Dec How to win at angel investing
May 12, 2016
In the 90s, after building my software companies in Silicon Valley, I went home to Australia and started a venture capital fund, running it for five years with a business partner. Years later, with resilient determination, the company gave birth to one of the best performing VCs in Australia.
We then eventually exited that fund, sold the portfolio, delivered eight times the return to the investors, and then I found myself looking around for a better way to really serve the emerging startup community in Australia.
With this, many aspiring investors have asked me to share my experience in the industry and personally design them angel investing (AI) and venture capital (VC) training programs.
This triggered my passion to further spread technical know-hows on AI and VC to better businesses in Australia.
It was a promising environment. There were lots of initiative, lots of good people, lots of good ideas, unfortunately, not a lot of good funding.
Most venture capital, to the extent that it existed, was waiting to invest much later in the life cycle. And again, that’s true in much of what we know in the world. So I went around the countryside, and four other guys thought it was a good idea and we started a national association—the Australian Association of Angel Investors— and then ventured on our own paths and started our own angel groups.
A little more than a decade later, the same question still presents itself: how can people win with angel investing?
Being invited by the Philippines’ MFT Group of Companies to speak at the Pan-Asian Angel Investing and Venture Capital Congress, I was given the chance to share the answers to this question with fellow angel investors.
I am thankful for working together with MFT Group in cultivating angel investing and venture capital community in the Philippines which can serve as a main driver in boosting the regional economy.
In the congress, I shared that to be successful as an angel investor, you need to understand how investments are sourced, evaluated, made and harvested. Then you need to build an investing strategy which aligns what you want to achieve with what you can offer. Then you need to construct an investing environment which enables you to execute effectively.
While it can take on different forms, angel investing, at the heart of it, is about people who are investing private money. And it is about investing their expertise so they are not passive; rather they are proactive investors who choose companies which they can actually help with more than just money—and this is a very important distinction.
Angel investors are differentiated from passive or reactive private investors by the commitment and requirement to invest both financial capital and intellectual capital.
What you invest in has to make sense; it must be something you know.
Successful angel investing is knowing what you can offer and what works for you.
Early stage business ventures need more than just money for success; they need people with the industry knowledge, experience and networks to help them reach their goals.
The proactive contribution of intellectual capital is a key element in the angel investing strategy to mitigate risk and promote success.
The value of putting up an angel organization, whatever structure you take, is it has to be something that delivers more people working on an activity, and therefore, having more time available to make it happen, making angel groups an attractive course of action.
To broaden your opportunity, join an angel group.
When you get together in an angel group, I say there are three core benefits.
The first thing you get by working together in a group is you get time. Doing early stage investing is very time-consuming. You to have to find the deals, evaluate the deals, negotiate the deals, do the deals, and that is just the beginning. Then the hard work starts, putting in the time and effort to help the company succeed and exit. If you are doing it on your own, there is only so much that you can do.
But when you get together in a group, you get all those people who can take on those portfolios, so now you get a scaling of time.
Two and three, is diversification. Diversification happens in two ways: by volume and by scope. A lot of different pockets or industries are ways to ensure that you don’t trap all your risks into one space. You get diversification by volume by putting yourself into more number of deals and by getting more people, you can put a little less of your money into a larger number of deals.
Diversification by scope is putting your investment into a lot of different pockets or industries. However, we only tend to invest in what we understand.
But joining a group of angel investors with different backgrounds in a variety of industries allows you to penetrate sectors which on your own, you would not understand.
Now, the way to spread your angel investments is to go cross-border. To syndicate, you must develop relationships with other investors because in this form of investing, whether alone of between groups, or funds within a space, it’s all based on trust.
Although angel investing happens at a stage in the growth of a company where there is very little people to work with, the success of the venture is on the shoulders of those people because they are pivotal to the kind of change that comes from significant growth, or the kind of change that is required to drive significant growth.
Execution is the biggest risk of an early stage company, and execution is all people-risk. And once that money comes in, it is still people who are responsible.
Reaping the rewards of angel investing cannot be solely achieved by defining strategies or knowing your way around deals.
In an increasingly connected global community, building relationships with people is the way to develop and succeed.