Tips for First Time Angel Investors

As part of Boulder Startup Week, David Cohen and Brad Feld held a Q&A for prospective Angel investors at the TechStars Bunker yesterday.  David is a serially successful entrepreneur, Angel investor and current Founder and CEO of TechStars, arguably one of the most successful mentor-driven seed stage investment programs for Internet startups.  Brad is a successful entrepreneur, founding partner in Boulder-based VC firm Foundry Group and co-author with David of Do More Faster.  These two guys know a thing or two about successful Angel investing in Internet businesses.  And as a prospective new Angel investor, I found the session pretty informative.

Here are a few tidbits of advice for those interested in becoming Angels from David and Brad.

First things first, be honest if Angel investing is really for you?  If you don’t have the ability to today write 2-3 $25K checks each year for the next 3-5 years, then don’t do it.  If you can’t lose every penny written from those checks without having a pit in your stomach, then don’t do it.  For you math wizards, that’s having between $150-$425K in cash sitting under your mattress today such that if your mattress spontaneously combusted it would be no big deal.  Why does all that cash need to be accessible today?  Because you will need to make follow on investments in the same companies over time, essentially committing that cash today or putting yourself at risk of not getting a sufficient return on your early investments.

Once you commit, determine the “volume and velocity” of your investments.  There are 3 variables you need to determine up front that must jive with one another:

1. How many total dollars are you committing to Angel investing?  Example: $600K
2. Over what time horizon?  Example: 3 years, so $200K per year
3. How many investments per year do you intend to make (assuming that each investment requires 2 funding rounds over the period)?  Example:  If each investment requires 2 rounds at $25K or $50K total, then you can afford to do 4 investments per year totaling $200K per year, or $600K over the 3-year period.

How does a new Angel get exposure to quality deal flow?  This for me seems like the biggest challenge as I contemplate jumping into investing.  The “best” deals with the most accomplished teams inevitably get funded by the highest profile Angels and VC investors.  And the most discerning entrepreneurs of course prefer experienced Angels with solid reputations and a track record of not just writing checks, but helping their portfolio businesses succeed.  Oh well, gotta start somewhere I guess.  David’s advice was to create a single-page investor profile – type of companies, investment criteria, size of investment, professional accomplishments, references, etc. – and distribute to a few well-connected and accomplished Angels and VC’s as an offer to co-invest with them.  The other way is to join an Angel Group.  But…

Beware of Angel Groups, they can be effective, but do your diligence.  There are good and bad angel groups separated by how active the individual members are at actually writing checks and making investments.  Ask how many investments the group has done in the past year?  What % of the membership is writing checks?  How do they qualify Angels?  If you are considering a group that charges entrepreneurs to make a pitch or for sketchy “boot camps”, run for the hills, its supposed to be the other way around folks.  Innovative groups such as the Open Angel Forum started by Jason Calacanis were created to truly serve the entrepreneurs and put these “bad” Angel Groups out of business.

Determine how involved you want to be in the target company – Leader/Active, Follower/Advisor, Everyone else/Passive.  There is no right answer, this is a personal choice based on how involved you want to be with the management of the target company and helping them raise the rest of the money they need.  If your investment strategy is to make 2 investments per year, then you are likely to take a more active role than if you are making 20 investments per year.  The key point both David and Brad make – be transparent and upfront with the entrepreneurs about the level of involvement you intend to have with the company.  Don’t have company leadership believing you will be actively advising if you intend to write a check and disappear.  And it goes both ways, a meddling or overbearing Angel can put entrepreneurs in difficult and distracting positions.

And finally, in order to be an Angel that doesn’t suck for the entrepreneur, follow these 5 simple rules.

1. Make a decision on your investment within 24 hours
2. Take the entrepreneurs phone call, especially when they are upset
3. Tell 3 other prospective Angels/friends about the Company (to help them close the round)
4. Clearly communicate your intended level of involvement post-investment
5. Directly contribute to solving 1 out of the top 3 challenges that keeps the entrepreneur up at night.