When Brian Cohen met the person who would later be the founder of Pinterest, it wasn’t long before Cohen knew he needed to be his angel investor.
Eventually, Pinterest was born and after discussing the investment with his daughter, Cohen realized it had reached a wide audience quickly. “She said, ‘My friends are using it all the time.’ BINGO. That was at the very early stages. The viral effect took place so fast.”
Cohen, who is CEO of Launch.it and the Chairman of the New York Angels, had hit what every angel dreams of – investing early in the “big” one, an earlier version of the now ubiquitous Unicorn
It’s hard to spot these big ones so early on, but a few are out there, so we need to keep our eyes open.
Dan Rosen, Chairman of the Alliance of Angels in Seattle, also hit a big one. But he arrived at it in a different way. The successful founder of the Sonicare toothbrush joined Rosen’s angel group. While an angel investor he continued his entrepreneurial ventures and came up with a new concept, Clarisonic. He offered the members of the angel group an opportunity to invest. Rosen was one of the early investors.
“This was a no-brainer,” said Rosen. “It met all the criteria – the deal had an extraordinary management team, they had done it all before, and were taking something they knew and applying it to a different market, which convinced us the market was absolutely huge.”
After a big bump from exposure on Oprah’s “favorite things” list and great sales, Clarisonic was later sold to L’Oreal for a nice profit.
I asked Cohen and Rosen to share their experiences in finding these Unicorns in an ACA webinar moderated by Villette Nolon, former chair of Seraph Capital Forum in Seattle and partnership director for the Angel Capital Association. Here are some of the insights they shared to help angels find the
When a company is in its early stages, there are risks and many unknowns. However, hidden amidst the risk lies opportunity. Finding it requires experience and an aptitude for sniffing out a good investment.
Picking Winners
Cohen says, while anyone with capital can invest, it takes something extra to be a successful angel. “There is a level of knowledge, process and best practices required. Being a part of an angel group definitely helps. Pro’s think about being an investor most of the time. It excites them and drives them. They are in it to make money, and that is a good thing.”
The biggest thing, Cohen and Rosen agreed, is finding an entrepreneur you trust, who has a good idea, a good management team, and a plan to eventually exit.
Beyond that, timing must be on your side. The company has to be first and they have to do it right. As an angel, you have to meet them at the moment of opportunity.
This requires always having your eyes open. Talk to everyone. Develop relationships. Pay attention to the market. Then, as Rosen said, “Figure out how your company is going to stand out.”
Due Diligence
Many angels know that due diligence is key to making a sound investment. But when it’s so early on how do you carry it out?
Cohen advises being proactive. “It’s about getting to know them, seeing how they function, and understanding how they think. How much do they really know about their customer? That’s really important.”
Looking into the background of the founding team and the financials is sometimes the best you can do.
Rosen said when it’s just a napkin and idea, you have to look at the market. The market has cycles and sometimes funding is hot and ideas get overfunded. “If you find yourself getting pressure from an entrepreneur or you have no time for due diligence, I’d pass. That is a red flag to me,” said Rosen.
On the flip side, Cohen said entrepreneurs these days should be ready for due diligence questions. This shows they are prepared for the investing process and will be good to work with. “When they are owning the moment, they are going to be in a better position to raise money,” he said.
Angel investors should ask: “What do you believe in? Why do you do it? What do you see so clearly? What drives you? Where are you headed? What do I need to see? How do you see the world after you’re successful?” When you are captivated with the answers it’s an indicator to potentially develop a relationship with them.
Advice for Angels
Angels do what they do because they love to help startups. They believe in what the founders believe in. So it’s important to keep yourself in check. Don’t fall in love and jump in too quickly. Do your due diligence, and keep an eye on your potential return. Rosen said if he can’t see a 10X return on the horizon, he isn’t likely to invest. Cohen likes to shoot to 30X, because even if it doesn’t get that high, at least it increases the chances of a high return.
As you do more deals and add to your portfolio, take note of what you are doing right. Ask yourself, what have you learned? How can you improve? Continually make your standards higher. Focus on quality investments. Smart money goes into smart businesses.
Joining an angel group is also a smart strategy. Groups help with deal flow and members can team up to tackle due diligence so you resist the temptation to invest in every deal.
Unicorns are part of what make angel investing exciting – they create the stories of angel investing lore. Granted, they don’t come along every day, but it’s important to be ready when you spot one. As Cohen and Rosen demonstrate, finding one requires a little bit of luck, trusting your instincts when you see one, and following good investment practices once you pull the trigger. I hope you’re lucky enough to invest in a unicorn. They can be important piece of your angel portfolio.
