What have I learnt as an angel investor?

Patience

Deals almost always take longer to deliver than you expect.  The script of the 3-4 year growth story followed by an exit to private equity or industry player rarely comes true. Why? Because life gets in the way: companies go through stages of being in the flow and everything going their way, to times where customers leave, products have less traction than expected.  In addition, management are not robots but people, with emotions and life events as well that can put them off track from time to time.  Investors need to understand that and allow for it in their thinking when evaluating opportunities and monitoring existing investments.

Diversification

Some investors just focus on one area or industry for their investments – this is a perfectly valid strategy to stay in your zone of core competence.  I prefer to diversify:

1) because it is more interesting to learn about and potentially benefit from differing themes and industries

2) because it gives a degree of protection if one industry is very hot today, but then blows cold a couple of years later and valuations fall.  

Remember that private deals often have a 5-7 year life before you get the opportunity to sell, so you need to be able to take an informed view on future trends and valuations. Otherwise you are running a higher level of risk – which is fine as long as you know that.

Getting Involved

The 80:20 Rule is alive and well within a portfolio of investments – we all intuitively know this, but many of my investments just get on and grind away without any desire or need for deeper involvement.  But a proportion do require a lot more assistance, normally as they are funded sub-optimally or have strategic challenges that I either didn’t spot when I invested, or came to light as the business grew.  I am happy to be involved and give my time, but many investors don’t want to get their hands dirty, which is fine as well.  Just decide which kind of investor you are and ensure the company management know from the start.  Many companies like to use their investor base to make connections for them, either in terms of asking for business leads / introductions, or to attract new capital to the company.

FOMO

Fear of Missing Out is a very powerful force in current market conditions.  Valuations are moving at such a fast pace that this concept has a much greater impact than at most times over the past 20yrs – not since the 1999 dot-com boom have I seen people prepared to agree to invest in businesses based on a five-minute conversation and pure trust from other parties.  I remember buying some shares in Oct 1999 at midday in the height of the first dot-com boom and going out to get some lunch. By the time I had returned the shares had doubled.  That is the febrile mood at the moment, and the crypto currency and SPAC boom are the poster children for it.

Sizing

This is a critical factor in managing a portfolio, how much to invest in each deal.  How much to put in a deal that looks like a steady 3-5x over 5 years, vs a deal that might be a 10x in 3 years – with only a 25% probability of success.  There are no right answers here – the investor’s risk reward criteria are the main drivers.

For the few FOMO style deals I have done, I tend to allocate a smaller amount of capital, and be prepared to accept whatever outcome happens.  That doesn’t stop me wishing that I had put more in if they do end up being a success, but also helps me deal with the disappointment or frustration if they fail.  Heck, we are only human after all.

Feedback

Generally management appreciate feedback on their business from investors.  Silent capital is fine, and in many cases preferred, so that there are fewer distractions.  But it only takes two minutes to reply to a trading update to say “well done” or “can you explain this to me”. It can really boost the mood of the management and remind them that they have people who are rooting from them from afar.

Follow-on Investments

Some companies just need one fundraise to fulfil their objectives, but most companies will want multiple raises to scale up as the business grows.  All being well, these will occur at higher valuations as the company hits its milestones – be they revenue targets, product adoption rate, or just design phase milestones. 

In addition, many early stage businesses are loss-making, or are slightly profitable but want to grow faster so spend more on sales or product enhancements.  If the company is asset intensive, then as it grows there are often working capital strains on the business.  As an investor, you need to decide how far along the company evolution it is and how many more funding rounds might be needed.  

If you choose not to participate in later rounds, then your ownership stake of the business is likely to be diluted – do you mind that or not?  If so, then invest less up front and save capital for the later rounds (albeit that they could be at higher valuation points).  Or invest more up front (at the lower price) and accept the dilution further down the road.  It can be a mixture of the two: generally I like to invest at the lower price, but if the business is executing well and wants money to grow faster, then that can also be an attractive proposition. It can also be lower risk as I already know the business, and can see a track record which gives a degree of comfort.

I am sure there are plenty of other lessons to be learned. Feel free to share this and get in touch with the things you have learnt from your investing.  And good luck out there!