5 Tips on Angel Investing from Veterans in this Space

Working harder won’t solve poverty, pollution, social inequality, and dozens of other major challenges we face on this planet. If we want to feed, clothe and house 8 billion people, address the host of health, environmental and other issues, good old fashioned elbow grease isn’t going to do it. But if we become effective at commercializing innovative solutions of passionate entrepreneurs, we stand a chance.

According to CB Insights, over 4,670 angel or seed deals, totaling $36.2B were made in 2022. More than ever, angel investors play an important role in solving some of the world’s greatest challenges, and they level the playing field in ways that support socioeconomic situations and diversity. Unlike traditional lending, angel investment is seldom tied to collateral, college degrees, or other assets that some entrepreneurs don’t have access to.

For investors themselves, angel investing is a mix of exhilaration and caution. It is the satisfaction of helping to build and grow successful companies with the potential to revolutionize aspects of our world, create jobs, and make meaningful contributions to society. Simultaneously, it requires a balance between caution and risk. About 50% of companies receiving angel investments eventually fail, according to Gust; 20% return the original investment; the same percentage return a profit 2-3 times the investment, and 9% return a profit of 10 times.

Experienced angel investors realize the importance of performing thoughtful due diligence, diversifying their portfolios, and getting to know the team. Even then, there may be no way to foresee a global pandemic, a stealth competitor, or other risks.

The “what ifs,” or the deal that got away are common among veteran angel investors. What can new and experienced investors learn from experienced angel investors? Following are 5 leading pitfalls long-term angel investors say that they have learned from.

1. Going it alone. The network is one of the most valuable assets an angel investor can develop. I’ve been doing this for nearly 20 years and like many, this was the way that I started. The importance of the network is why I decided to found San Diego Angel Conference, and have worked with Central California AngelCon, AngelNV, and the NorCal Angel Conference. Having a great network is good for several reasons: 

  • Investors pass deals around. I may see a deal that doesn’t meet my criteria, or I can’t invest in it for some other reason. If I see a good deal, I’ll share it with other investors in my network that I know are interested—either in an industry, a problem they care about, a price point or expected timing on a return.
  • Investors lean on each other. There are a handful of industries, or functional areas, that any given investor feels comfortable with. If I see something interesting, I’ll call someone in my network and ask for help deciphering the deal. People in my network call on me in the same way.
  • Investors invest together. The majority of investors, something like 80%, have a net worth of $5M. For those of us in that category, we’re not really in a position to write $50K–$200K checks, and honestly, we don’t want startups to have crazy cap tables loaded with small-volume investors. The legal structures have gotten so much better, and the costs have come down to assemble investors using instruments like the SPV [special purpose vehicle] to invest together. In addition, when investing this way, an investor can spread the post-investment responsibilities around and be more helpful and useful to the founder with the focus on scaling and success.

Get to know people and groups in your area. Look for a group that connects angel investors with promising early-stage companies and that provides the education and information for both groups to lead to a healthy pipeline of deal flow. The program’s investment fund should also be managed by accredited investors. There are angel networks and funds everywhere these days. The Angel Capital Association keeps a list and has some great resources. 

2. Going with your emotions and not doing enough due diligence. Serg Dmitriev, involved with strategic changes at companies like Cisco, Apple, SAP, and US Department of Veterans Affairs for 20+ years, laments that one of his earliest pitfalls as an angel investor was being “too much in love with the idea.” “I just loved the team and the values of the founder,” says Dmitriev, causing due diligence, and risk assessment to take a backseat in betting on a validated proof of concept in one country that did not translate well with radically different consumer habits in the new market. 

Another emotion that can creep in, as Stacy Pena, Chief Business Officer at Six Dragonflies Capital and Co-fund manager of SDAC V, and Tammy Stevenson DVM, DACVIM (Neurology) agree is FOMO or fear of missing out. Aim, instead, to assess opportunities objectively. Spend time getting clarity on what’s important to you and what you want to get out of an investment.

“If you look at the role of the investor your biggest focus should be on ‘protecting your ROI’,” Dmitriev cautions. Some thousands of pitch decks later, he looks for the following key questions and points to be addressed in founder pitch decks:
Who is your customer? Client segments?

  • What problem are we solving?
  • How do we solve it?
  • What is unique about us? Why will clients be loyal (churn)? 
  • Numbers need to be consistent throughout the presentation 
  • Data about our market and competitors.
  • What are our sales channels? How effective are they (conversion)? What is CAC?
  • Who is the team and what are their key competencies?
  • What are we asking the money for? If we get the money, how will we use it? Actions with dates. This should show our speed.
  • What are the key numbers of our financial model?

3. Not having an appropriate framework by which to evaluate the opportunity. “All of my mistakes [as an angel investor] could be summed up in the phrase ‘I didn’t know what in the world I was doing’,” says Steve Kiser at Veteran Ventures. “As angels we get pitched ideas from all over the place. At an angel conference several years ago, I was pitched a medical device company; an ag-tech company; a coupon-clipping company; a goat-as-a-lawnmower company; and a tax software company, all in a single 6-hour day.

There’s no way an angel can adequately understand each of those verticals, which is a predicate to being able to understand if the startup being pitched can disrupt and scale in those verticals.”

This is another benefit of having a network. “Until you have an appropriate framework and methodology to help you handle all of that diversity of opportunity, you’re not investing—you’re gambling,” he warns.

4. Putting too much money in the first deal. A lot of angel investors make this mistake early on; we invest too much money on one of our first deals. We look at a few deals and decide, for whatever reason, to invest a big chunk of our budget into one deal. “My two earliest investments were my biggest by far,” says Stevenson, who adds that in addition to FOMO, making too big of an investment in the first few companies was one of her early pitfalls that she has since worked to overcome.

Pankaj Kedia, a tech intrapreneur (from Qualcomm and Intel) turned early-stage AI/Deep-Tech investor, venture partner, and member of SDAC and NuFund Venture Group, says he has learned a few insights in becoming a seasoned investor. Examples of how he approaches angel investing now as opposed to his early days, include:

  • Fast No-s, Slow Yes-es => Started out with Slow No-s and Fast Yes-es
  • Start with a small bet, Double up over time => Started out putting bigger checks in the first rounds
  • Make a plan. Stick with the plan => Started out by investing too much too soon, and running out of budget for the year
  • Market size AND Founding Team => Started out putting too much emphasis on the team or too much focus on the market size

Novice angel investors might also consider a member-managed fund with a small unit cost—such as San Diego Angel Conference (SDAC), NuFund—that lets them learn while they build a portfolio. 

5. Signing an NDA. What I have learned is that most NDA’s are sweeping and cover things you wouldn’t expect. They also prevent you from doing good diligence or sharing deals with other investors. 

When I get serious about a deal, I often talk with colleagues and others for input to better understand aspects of it. An NDA prevents an investor from doing that. Early in a conversation with a founder I don’t need to know highly confidential information that an NDA protects. If I get far enough into due diligence and it becomes important to the deal to know the more confidential aspects–like software code, methodology, or a unique sales process–I will work with a founder to identify a third party, we both agree on, to sign an NDA, evaluate confidential components and report findings to me so I can make a more informed decision. 

Mysty Rusk is founder of San Diego Angel Conference and Executive Director of the Knauss School of Business' Free Enterprise Institute, the home of the San Diego Angel Conference, the Brink Small Business Development Center, and student entrepreneurship programs at University of San Diego. She has been involved with the Willamette Angel Conference, Central California AngelCon, AngelNV, and the NorCal Angel Conference. She also leads the America's Small Business Development Center workgroup on Technology Commercialization and Innovation Interest Intersection. She can be reached at mrusk@sandiego.edu.

Portions of this article taken from Mysty Rusk’s article on TechCrunch.