hey everyone today I want to talk about
Angel Investing lots of Founders are
trying to raise pre-seed or seed rounds
and don't really understand exactly how
Angel Investing works and of course lots
of successful Founders and business
people folks with a little bit of
disposable money are interested in
getting into Angel Investing but don't
really understand how it works so I'm
creating a series of episodes on the
fundamentals of Angel Investing
targeting Angel Investors so I'll be
speaking directly to the prospective
investors but I think the content in
here will be really helpful for Founders
in understanding the mindset and
processes behind Angel Investing I hope
it'll make it much less of a mysterious
process
welcome to feel the boot this Sciences
startups I have been an angel investor
since 2012 I'm on the board of directors
of my local Angel group and chair our
selection committee which means I'm the
person in charge of determining which
companies make it through to present to
the group and I want to help you
understand how Angel Investing works and
how to get started in that whole process
today we're going to start off with just
an overview of what is Angel Investing
Angel Investing is individuals investing
their own money into startups so this is
not a fund this is not a venture capital
these are individual typically High net
worth individuals who are making
personal investments into the startups
based on their own judgment of whether
this company is going to be successful
traditionally you needed to have a lot
of money in normal Angel Investing
twenty five thousand dollars is often
the minimum check size accepted
sometimes you'll see 10 then often
you'll see 50 or 100 000 as the minimum
check size which excludes a lot of
people but with the Advent of
crowdfunding and syndicates it's
suddenly been possible to get involved
in Angel funding at a much more modest
level so many of these vehicles allow
you to invest one or a few thousand
dollars less than five and some kinds of
crowdfunding even allow you to get in at
just a couple hundred dollars so it
really has democratized one of the
interesting things about Angel Investing
is that because you're making an
investment of your own money you don't
have a fiduciary duty to anyone else you
can choose whatever criteria for
investing you want which means it isn't
always only about the returns although I
recommend it be a lot about the returns
or you're not going to be an angel
investor for very long but you may
choose to focus on things that have
environmental benefits or health
benefits are tied to some particular
kind of
geography or medical situation whatever
it is you want to focus on that can sort
of be a thumb on the scale in favor of
those deals as opposed to companies that
don't meet your personal interests and
Passions
as an angel investor you are buying a
piece of the company and so it's really
just exactly the same as buying stock in
the public stock market where you're
buying a piece of the company except in
this case you're probably buying a much
larger piece of the company but if
you're buying some shares of apple right
now you're probably getting
0.0001 of the company whereas when
you're investing in a startup you
actually might be getting a couple
percent of the company it's a big
investment maybe 10 20 30 percent of the
business in exchange for your investment
but it's not liquid in almost all cases
you can't sell it they're beginning to
be some secondary markets out there but
they really only exist for companies
that are already already fairly down the
path and being successful the pre-stage
you're pretty much locked in whether
things go well or bad for the Long Haul
probably five to seven years so there's
a big difference from the ordinary stock
market now when you invest you might get
stock
a typically preferred stock which is
again a difference to the conventional
stock market as an angel investor you
always want to get preferred shares they
provide some additional protection to
you as an investor but in many cases
especially in the precede rounds you
might not be actually investing to get
stock you're going to invest to get
something that turns into stock and so
that'll be a convertible note or a safe
both of these are investments that allow
you to sort of hand wave all of the
complicated negotiation of terms
basically focusing on just the valuation
and then at some future time in a later
round you get to convert into the stock
and piggyback off all of their
negotiations so if you're in a precede
you're probably buying something that
converts later rounds usually getting
preferred stock but these rules are not
hard and fast you see convertibles later
and you see precedes selling hard stock
but it's important to Think Through the
implications of that when you're making
your investment as an angel you get paid
when a company exits so when it either
IPOs which is rare or when it is
acquired with much more common outcome
either of these can be great results for
you as long as the valuation is high
enough
but that means that the company you
invest in as an angel has to be driving
towards an exit at a high valuation in a
reasonable amount of time and that
actually doesn't describe most companies
so if you've got some relative who wants
you to come in and invest in their car
wash franchise or whatever it is that
really isn't a conventional Angel
investment because that car wash
franchise is highly unlikely to turn
into a 500 million or billion dollar
company and provide an exit opportunity
so if someone's planning to start a
business that they're going to run for
the long term that can still be good
investment but it really isn't an angel
investment and the kind of structures
that I'm going to talk about in terms of
Angel Investing don't work there because
there isn't a reasonable time frame to
an exit event where you get paid if
you're just buying stock you only get
paid in an exit Angel Investing is
incredibly high risk especially when you
look at it on an investment by
investment basis
typical statistics are that between 80
and 90 percent of the companies you
invest in will fail to return even your
initial investment a large fraction will
go to zero some fraction will return a
little bit maybe there's an aqua higher
and the founders get hired off and a
little bit of money comes back to the
initial investors but most of the times
it's a wash you're also going to be
locked up for a long time so the typical
time frame is five to seven years for
any given investment so if you're
thinking about Angel Investing it's
important to think about the pool of
money you're going to set aside for this
activity because you're not going to
have access to it for a long time and
you need to be comfortable losing it if
that's the way things fall out at the
same time Angel Investing has incredible
upside in general you don't even want to
look at deals where you can't see a path
to making at least 20 times your money
50 is much better and the best angel
Investments out there return thousands
of times your initial investment if you
got in on the ground floor of someone
who's going to become a unicorn or a
deck of corn the returns can be
fantastic that's why you're in the game
in fact it is a statistics game those
winners have to produce really well and
have the potential to produce really
well to offset all the losers that
you're likely to invest in I mean at
some level the perfect investment
strategy would be to pick one company
have it be and be right about that one
company being insanely successful
however to date we haven't really found
any people with this ability to have
psychic Force thought to only invest in
the winners so you need to take a
broader look and make sure that all of
your Investments working together can
work out for you as an angel most of the
companies you're going to invest in are
very early stage so when you're at the
precede or seed stage these companies
are pre-revenue or very early Revenue
they may just have an MVP or a prototype
some companies start trying to raise
angel on just the idea stage or very
early prototype versions of the product
most angels will not invest in those
companies and I recommend against it the
risks are yet another Factor higher for
those extremely early stage companies
and that's usually the realm of the
friends and family investor people who
are investing in the company because of
the founder more than the business right
you want to help your nephew or your
friend or your roommate because you
believe in them you believe in the
business and you have some insight into
their character as a full-time or or
semi-professional angel investor you're
typically going to want to see people be
a little farther along but still in the
life of a company super small super
early stage there might only be a
founder or a couple of co-founders in
the company and they're just beginning
to get that product out there they
probably haven't hit product Market fit
lately yet for Angel we're typically
looking at valuations between one and 10
million dollars these days with the
recent inflation so creeping up maybe to
as high as 15 million but fairly modest
compared to the kind of numbers you see
thrown away for the com thrown around
for the companies that are getting media
coverage as an angel you really want to
be investing in the company to fuel
polishing or improving the product and
generating growth helping the company
explode usually you want to avoid
investing in proving out the technology
and running science experiments again
the risks get too high you want the
founders to have done the groundwork and
all of those science experiments and
validated what they're doing at which
point you give them the cash they need
to actually execute on that and make it
go big a final aspect of Angel Investing
is the opportunity to get involved in
the startup if you buy stock at a public
company your involvement in that company
is effectively zero I guess you get to
vote your proxy shares in the
shareholder meetings but you really have
no influence whatsoever and they don't
care what you think with an angel
investment you're putting in a
meaningful chunk of money into the
company potentially less so with
crowdfunding rounds and often the
company is looking for the angels to be
involved and bring value beyond the
money that they're putting into the
company and that can often be much of
the pleasure of Angel Investing I've
often described Angel Investing as most
of the fun of running the startup
without 100 hour work weeks and
continuous existential dread you get to
be playing in that game and at cocktail
parties you can talk about the cool
things that you've been involved in with
the companies that you're investing in
but at a slight remove right you don't
need to be in the trenches with them but
still you could be very helpful people
and make a substantial difference to the
odds of success of that company with
your experience networks uh you know
direct Hands-On help from time to time
with things where you have a skill set
that maybe they lack at the moment and
don't have the money to hire in just yet
in the next couple of episodes in this
series I'm going to talk about how to
get started as an angel investor and go
into a little more detail on the
economics of Angel Investing and exactly
how that works out and how those
realities influence the way you should
be thinking about making Angel
Investments thanks for watching this
episode I hope you found it useful and
interesting whether you're a potential
angel investor or a startup founder
please if you enjoyed this give it a
like subscribe ring that Bell it helps a
huge amount make sure you'll see those
next episodes in the series if you're a
Founder I encourage you to join the
field of boot Founders Alliance it
allows you to network with other
Founders if you're an angel you might
enjoy hanging out there too gets you a
chance to meet some of the other
Founders and interact a little bit
although it really is a space designed
for them
if you're a founder and you need help
with your startup don't hesitate to sign
up for the field boot boot prints
mailing list you'll get a link to be
able to get office hours with me I can
help you out with any issue you may be
running into and I'll even extend that
to Angels if you're just getting into
Angel Investing and you've got questions
about what that process is like go ahead
join the mailing list I'd be happy to
talk to you about it trying to it's
always good to grow the community of
Angel Investors until next time ciao