Below are a few ideas that I am contemplating whereby angels can take advantage of these trends to increase their returns.
• Angels should consider structuring deals that result in a return of all or portion of their investment, once the company has raised a predetermined amount of capital – a twist on “venture lending.” The angel retains upside in the company while having new cash to invest in other start-ups. This also balances the appetite for risk the VC wishes to take on with the lower risk the angel has enjoyed.
• Early stage valuations should and probably will go down when professional firms become more involved with early stage deals. Angels typically act from emotion and pay too much, while VCs don’t work towards the lowest possible valuation since they have liquidation and valuations protections that angels don’t. Angels valuation need to be much lower than VCs
• As a rule of a thumb, angles should invest in either 1) spaces in which they are experts, or 2) in people that they know well and believe in.
• Angels and firms specializing in early stage ventures will have a distinct advantage if they can achieve the following:
o Build a reputation for being supportive and fair to founders
o Obtain access to and maintain a strong deal flow
o Develop processes that allow swift deal closure
o Sound investment discipline
o Develop a close relationship to a strong advisory board that can help make investing decisions, asses the founder(s), and can help the portfolio companies long term.
o Allow successful portfolio companies high quality intros to more money
o Be flexible with exit terms or with dividends
o Offer the founder(s) strong personal unconditional support, and an open, peer-to-peer relationship even when you don’t all agree.
I can’t stress how important this last bullet is and how often investors make founders life miserable with or without knowing it.
• Crowdsourcing? I have been asked if it’s a viable option. In my view, the jury is still out. It may evolve into a more effective way to raise money for legitimate but orphaned initiatives such as experimental drugs and medical treatment. This is because many of the financiers will be close to the problem and will have emotional reasons for being involved. Or as we already saw, for gimmicks.
• In current investing environment, Angels should always consider investments in companies that can demonstrate organic growth and the ability to bootstrap at some level. These businesses are inherently less risky and require smaller angel investments.
As I advised above, I have made many angel investments and have a few general rules that you may learn something from. First, I only invest in payment related ventures. It’s what I know best, and I am in a position to offer advice to my portfolio companies. Also, I tend to include a good level of venture lending in my investments. In this way, I get my investment back sooner while retaining an equity position as the business continues to grow. Regardless of style, angel investing is a privilege and it is fun. Following a company in the very early stages is very rewarding – just mentally write off those funds and don’t set your expectations too high.