Good News: Western Massachusetts is home to one of the top 100 startup accelerators in the world and has a rapidly growing entrepreneurship ecosystem. We have dozens of exciting young companies being born every year right in our back yard. WHAAAAAA WHOOOO!
Bad News: Those companies need access to high-risk capital but we don’t have nearly enough angel investors (AKA wealthy people who put their own time & money into startups). Too few angels means too little capital. Too little capital means many of our region’s greatest companies will have to move to where they can find the money.
The Opportunity: If you believe, as I do, that entrepreneurs are our best hope for growing the jobs and prosperity of our region, and if you have an income of at least $250k a year (and/or have a high net worth), I invite you to become an angel investor for our region. Doing so gives you the opportunity to help entrepreneurs with your money and your expertise. Startups are hard. Most fail and in so doing lose their investors money. But the ones that succeed create economy-saving jobs & prosperity. Their founders and investors earn enough to become the philanthropists of the future.
It truly is an opportunity to do well by doing good… and have a blast doing it.
If this sounds like interesting, I invite you to come to a meeting of the River Valley Investors, meet the crazy people betting on the innovators of the future, and consider joining us. To get meeting details, email me email@example.com.
Marianne Hudson, executive director of the Angel Capital Association (the trade association for angel investors in the US) wrote an article making the case for wealthy to consider becoming angel investors. Her full article (with her permission) appears below:
The other day I was listening to an entrepreneur pitch his company to a group of potential investors and it hit me how great it is to be an angel investor. I’m admittedly biased, but I think being an angel investor is one of the best things high net worth investors can do. Supporting great entrepreneurs is a real kick – and it can bring significant financial returns.
The rewards are many, assuming you can check yes to these basic caveats: Legally, you must have the wealth or income to be an accredited investor. Personally, you must be willing to lose your investment money, should have a portfolio strategy, and use good investment practices. This high risk, high reward kind of investing isn’t for everyone, but for every article I read encouraging people not to get into angel investing, I see more reasons to do it.
First, consider the potential financial returns. A study found that the overall return on 1,100 plus angel exits was 2.6 times the money in 3.5 years, or about 27% gross Internal Rate of Return. Not bad compared to other types of equity investments. Even so, it’s important to look into the details. More than 52% of those exits lost some or all of the investment and 7% provided nearly all of the returns. This means that angels need to start with a strategy to make multiple investments to minimize risk and increase the chance of good returns. Angels should also educate themselves on good angel investing processes via events, reading and networking with experienced angels.
Angel investing can also help diversify your overall investment portfolio. Ryan Feit, CEO of SeedInvest, put it this way: “Allocating 5% of your overall portfolio into angel investments can increase returns while lowering volatility. This is because early-stage, private companies generally have a low correlation with traditional asset classes, such as stocks and bonds. A recent SharesPost whitepaper concluded that allocating 5% to private growth companies could increase the returns of a traditional portfolio by 12%.”
While returns are the measuring stick for any kind of investment, investing in early-stage companies provides a whole set of additional, hard to find, personal rewards:
- Meet interesting people with fascinating ideas – Top entrepreneurs are the best communicators I’ve ever seen, getting across their technology or medical innovations in ways nearly anyone can understand while also explaining their business models very well. You can feel their tremendous passion and see how fast the wheels in their brains are going. Through angel investing I have also had the pleasure of meeting other investors. Often we have highly different backgrounds, yet we share a common core that builds great bonds, leading to long-lasting, true friendships. And let’s not forget the great food and beverages we enjoy as we analyze and debate our next investment.
- Support what you care about – Since angels decide which companies they want to invest in, they can put their own money in the kinds of businesses that are the most important to them. This might be industry sectors you have experience in, or entrepreneurs who are alumni of your university, or supporting a demographic you care about such as women entrepreneurs.
- Know you’re doing good – As Feit says, “Unlike any other type of investment, startup investing provides the opportunity to invest in innovation and to feel real ownership in the companies that you invest in. Every year, angel investments create thousands of revolutionary and life-changing technologies.” I’ve met so many angels who are also proud that the companies they invest in create new jobs.
- “Entrepreneurship without the responsibility” – Super Angel David S. Rose coined this phrase in his 2014 book“Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Startups.” Entrepreneurship is exciting. As I wrote a few years ago, one of my favorite angels has said how much he loved starting his very successful company and selling it for a great return, but he didn’t really enjoy the part in the middle—running and growing the company. As angel investors, we know that the responsibility for a company’s success lies with the CEO and we can enjoy being involved with the company without having the responsibility of leading “in the middle” to get to a great exit.
- Learn new skills – Angel investing offers something new for everyone. Learning new things like deal terms, the most effective way to mentor entrepreneurs, or how to be a good board director can be lots of fun. Sometimes gaining these skills can also lead investors on new life paths. For instance, one reason angel investing is attractive to women is because it’s a fast track to learning about being on boards of directors, getting board experience, and then leveraging this to become better candidates to serve on corporate boards.
- Apply current skills in new ways – Angel Barbara Clarke is an example of how an investor’s background can contribute to the angel process. As she told me recently, “Everyone on a due diligence team has their own unique expertise and experience. For example, angels with journalist backgrounds are good at research and interviewing. My background is management consulting, and I’ve found that I am comfortable with competitor and market analysis, even in industries and fields I am unfamiliar with.”
When you add the financial benefits with the personal perks, how can’t you make a case for angel investing? My advice? Continue to learn as much as you can about angel investing before diving in, but know up front that it is one of the best things you can ever do.
The Angel Capital Association put our a great starter guide for people who are Angel Curious (my term, not theirs :)).
The Short version:
- Make sure you meet accredited investor standards
- Understand the risks of investing in startups
- Educate yourself
- Ask experienced angels for advice
- Join an angel group or angel platform (like the River Valley Investors)
- Develop an initial investing strategy
- Actively participate in Q&As
- When ready, write that first check
Get the full details from the original article here.
Steve Blank, who developed the #1 entrepreneurship curriculum in the world, recently noticed some of the failings of angel/vc/accelerator pitch events and then proposed an alternative.
Key to his proposal is the real life example of “Moneyball” – where a team proved it could use cold-hard-metrics to dramatically improve upon the old gut-instinct-only system Steve thinks this can be done for startups, and I am inclined to agree with him.,
I invite you to read the full text on his website and engage in a dialog about it. Could this give angels a much better way to pick the winners out of the super-early-stage companies we love to work with? Might it be a better fit for angel groups outside of the major innovation hubs – angels that don’t already believe they “got it” :).
And lastly, might it imply a different model for angel groups? Instead of bringing in a few companies a month for “1st dates” that emphasize pitching skills, should we be bringing in batches of companies and putting them through a Lean Launchpad experience and evaluating them after 10 weeks of hard work (that we witness)?
Originally posted on the River Valley Investors blog here.
My thanks to the wonderful Frank Peters (@FrankPetersShow) for interviewing me RE using metrics to improve #angel groups. You can hear the interview here. The blog post that started all this is here.
Frank, your show has been a MAJOR help to my angel group. Thanks for for all you do!
Angel groups only survive because their members invest of their own time and energy. All of us group managers struggle with how to increase levels of activity. More=better.
With our portfolio companies we don’t settle for prose-laden emails and verbal updates… we demand cold, hard metrics. Metrics force a clear conversation that, if chosen correctly, are a powerful driver of success / indicator of impending doom. Most of us use metrics to monitor our personal progress in life & business: weight, miles run, calls made, dollars raised, etc. So can we create some metrics for our members to help them have a clear picture of how much they are helping their angel group succeed? I think yes. In fact, we already use some metrics: #deals closed, $’s invested, # of members. But those are group-specific and miss a LOT of good stuff in between. What if we tried to…
- Measure Contribution – Attend a meeting, run a due diligence effort, attend a conference to scout out deals, recruit a new members… all of those help a group. So let’s measure them. Take the time invested, multiple by a billing rate (maybe $500/hr) and call it their contribution. Let’s define the sum of all contributions from all members of an angel group as the group’s “Valuation.”
- Communicate It…
- In every email, and at every meeting, show the “Valuation” of the angel group and how much it has increased over the past 3 months. This helps remind everyone we are in this together, we are working to grow the group, and are making measurable progress.
- In every email, and at every meeting, recognize the members who have made the largest contributions to the group’s valuation. Do it for the top people who have done the most in each important category: dealflow, recruitment, helping portfolio companies, etc.
- Go beyond recognition and actually give people some simple, but appropriate, gifts as tokens of thanks. Nothing fancy is needed, accredited investors don’t need gifts. But all of us like getting them. These can vary from plaques given out at an annual social event to far simpler things like $5 Starbucks gift cards and group-branded clothing.
Implementation: Everything listed above can be prototyped using GoogleDocs without a line of code for no out-of-pocket cost. The gifts can be prototyped for <$1000.
As always, thoughts and feedback are welcome.
UPDATE 8/3: Brian Case of Bradway Financial made a great recommendation: expand the startup company metaphor. Keep Valuation as a measure of total contribution. But keep going. If angels are partners in making the group a success, treat them as such. Issue them “shares” that correspond to their contribution (each share is a dollar, each dollar’s worth of contribution translates into a share). Then, at each meeting, display the angel group’s cap table – listing all the members and their ownership in the angel group. Note: no real shares are being issued, there is no legal entity the angel a part of… this is all a metaphor, but one that makes sense to angels. It reinforces that all the angels are partners in making the venture a success and it makes it instantly clear which angels are making the biggest contributions and who we should be thanking.
I recently joined the board of advisors for Cdling.
"Cdling (pronounced "seedling") is a platform that builds trust across global startup communities. We help investors, startups and the experts who support them allocate attention and resources better."
Startup finance, as wonderful as it is, is still LOADED with friction that kills innovation and slows the pace of human advancement. This company has a solution that could dramatically change that. Their use of crowdsourcing techniques has the potential to dramatically change how things are done. To learn more, visit their website.
For those of you who have tracked my blog for a while, you know I was working on ways to incorporate prediction markets into the startup financing world. Cdling is doing that, better than I was! So I’m getting behind them and pushing :).