By Alyssa Hurst
When you invest in the stock market, you have help. The risk of losing your money is mitigated by mounds of data that inform your decisions, and there’s a decent chance your risk will be rewarded. When you invest in real estate, you benefit from a stable market and the ability to sell at any time. But when you’re an angel investor putting money into a startup, all you have is an idea, a team and a gut feeling.
Angel investors see hundreds of pitches a year — most of them unorganized, unclear and unimpressive. Angels lock on to the occasional gem and build their portfolio with companies they believe in, but most of those brilliant ideas still fail to become successful companies. For this reason, says Brian Cohen, chairman of New York Angels and founding partner of New York Venture Partners LLC, making money as an angel investor is “almost impossible.” “When I talk in front of a large crowd of angel investors, I always ask, ‘Does anybody know anybody who has made money in angel investing?’” he says. “They don’t.”
Angel investing is fun
So what continues to draw wealthy retirees and former entrepreneurs to writing big checks they may never see a return on? “Think how engaging it is. It’s so much fun,” says John H. Cammack, managing partner at Cammack Associates, and a long-time angel investor. “Every one of my startups is like its own reality show. It’s a little civilized game of survival where you aren’t fighting against each other, but you’re fighting to take your idea to the next state of maturation in the time permitted by the money you raised.”
And, for someone drawn to the “courage and grit” of a new generation of entrepreneurs, Cammack says angel investing is a great way to put yourself right in the thick of it. “With a startup, any one decision could be extremely consequential. … If it doesn’t work out, you may not ever have time to recover,” he says. “I use my life experience in a way that is often the missing ingredient.”
“Angel investing is a way for me to achieve a couple of goals at once,” says Chris Halligan, partner and COO of Payzer and operating partner at IDEA Fund Partners. “Those goals are making money, doing something interesting and supporting an economic ecosystem that I care about. If I can do all three of those at once, that’s a good thing,” he says.
In addition to what Cohen calls “the emotional component” of angel investing, the practice allows investors to become part of something larger than themselves. “We just invested in Immunome,” says Ellen Weber, executive director at Temple Innovation and Entrepreneurship Institute and Robin Hood Ventures. “We are betting that they are going to beat cancer.”
… But it’s not just about the fun
While most angel investors will tell you they’re having fun, Cohen says it’s important not to be a tourist. “What happens is, a lot of angel investors do it too casually. They give bad advice, they aren’t good at it, but then they do it again,” he says. “Angel investing should be seen as a professional activity.”
“Do your research,” says Andrew Chang, co-founder and managing partner of Washington, DC’s government-contracting startup incubator and accelerator Eastern Foundry, and an investor himself, “A lot of people are trying to come into this space because it’s the cool thing to do. It sounds cool, but it’s a lot of work. For every 20 investments you make, you might have one or two successes.”
For the prospective angel investor, the experts recommend joining an angel group. These groups bring together angels who can not only provide better deal flow to help you build a diverse portfolio, but can also lend expertise. “In a group like Robin Hood, we have people who understand finance; we have people who understand sales; we have people who understand the cloud; we have people who understand Bitcoin,” says Weber. By surrounding yourself with the knowledge of others, you can make more informed decisions about companies outside your scope of expertise.
In addition, working alongside people who have developed a nose for strong startups can help you ultimately find more success as an angel investor.
Says Cohen: “The wisdom of the group makes a massive difference in terms of whether or not you’ll invest in something. … Who will tell you, ‘That’s a bad idea’? You need someone to do that for you.”
In fact, Cohen says establishing yourself in the angel community is key to finding great startups to invest in. “You’ve got to be an addict at this. You’ve got to go to every startup contest, every university. You’ve got to seek out investment opportunities everywhere.”
Focus on the team
Once you have the backing of a strong investing group, it’s important to realize that angel investing isn’t about the next big thing. Instead of focusing heavily on a great idea or a groundbreaking product, investors like Chang say “it’s all about the people,” and that doesn’t just mean the CEO. “We are investing in the team. It’s extremely critical that the CEO be strong, but we are also looking at their team,” says Weber.
“You’re betting on the jockey a lot more than you are betting on the horse,” says Halligan. “In some cases, these companies will change the markets they are in or their value proposition or their approach. The people typically stay the same.”
Most importantly, angel investors need to decide whether that team can turn their great idea into a successful business that can ultimately get to the exit stage and make money for investors. “We don’t invest in a company because they have the right idea,” says Cohen. “We invest in a company because they can execute on a big idea. … I’ll take a bad idea executed brilliantly any day against a great idea executed poorly.”
Hands on or off?
For many angel investors, part of the draw is being able to take an active role in growing a fledgling company. “The part that is extremely satisfying is working with entrepreneurs to make decisions that allow them to survive to get their next round of funding,” says Cammack. But part of being a good angel investor is knowing when to lend your expertise, and when to step back and let the CEO sink or swim.
“If there’s an early-stage company that is trying to grow, I’m a good resource. I’ve grown companies. I enjoy sharing my expertise, and that’s a really important part of doing the investment,” says Halligan. “If … they want some expertise, I’m happy to share it. I don’t force it on them though.”
Cohen agrees: “Just because you put money into it doesn’t mean you know what you are doing. … The greatest value angel investors provide is opening doors to partners and customers.”
Ultimately, angel investors have to look for startups that elicit what Cohen calls “that sort of light, or the chill that goes up your spine.” And while veteran investors like Cammack have developed methods for weeding out the promising startups from the duds, he says it’s important to know that most of your investments won’t reach the coveted successful exit.
So, faced with gut-churning risk and the prospect of financial losses, it’s natural to find reasons to say no to every startup that walks through your door, says Cohen. “Everybody wants to do something that Wall Street calls due diligence,” he says. “In the early stage of a startup, there’s very little due diligence that is possible, so you have to believe in them. … I call it do diligence. I look for reasons to ‘d-o’ do the investment.”
We asked local business leaders to tell us how they pitched their company to investors, and what lessons they learned in the process.
You’ve got to sit down and do your homework and say, “What are we really looking for?” I think the mistake made more often than not is that entrepreneurs think it’s just a matter of money. And really the value you can tap into with the right angels is experience. They may have been there before; they may have grown an organization from your stage to several stages past. … Know exactly why you are [looking for investment]. What we did was put together kind of a playbook of the different kinds of angels. Some had industry knowledge, some had professional services knowledge so we could tap into them for legal or accounting advice, some were storied entrepreneurs who had done it before. … Putting some thought into it really can pay dividends. … There are many different flavors and many different agendas as to why an angel investor wants to get involved with a company. Some purely want to make more money. Show them what their return is and they will be great. Some want to roll up their sleeves.
Suzanne Flynn Speece
It’s All Gravy
It depends on who the angel is and the nature of the relationship, but some angels bring expertise on the development side, as an example. So they’ll have expertise on how a new product that we want to build should be structured. Other angels are more on the business side, so they have experience, for example, in the recognition space and have a lot of industry knowledge around recognition and our target market, so they can give some guidance on things of that nature. They’re more involved in the vision. It varies based on the expertise, and that’s something you think about when you are fundraising because it’s nice to get a range around the table to help complement the expertise of the team. … Our pitch is very much about the pain point, the market size, the opportunity and why this team is poised to disrupt that.
We have raised several million dollars through angel investors. Some of those angel investors are active advisors. Some of those angel investors I might talk to once a year. I would say a lot of them I keep in regular communication with. We send them monthly newsletters and I have quarterly calls which are optional to them. … A lot of the investors I lean on for advice. I might lean on them for strategic advice, [such as on] considering an acquisition. I might lean on them for personnel advice, like how do I handle this situation with an employee or another investor? Personally, I get a lot of support from them in terms of my own personal professional development. I’ve pitched to probably five or six angel groups and I’ve pitched one on one to probably more than 50 or 60 different angel investors. … I would say the common thing is they all are interested in your vision for how you are going to have an exit. They want to make sure it’s not a lifestyle business they are investing in. They want to make sure there’s a clear path for exit.
Founder and CEO
In the world of investment, there are a lot of investors who [promote their] strategic value, whether it’s an incubator that is highlighting “We will help you with legal and accounting services” or it’s an investor who says, “We have all of these connections.” I’ve found that to never once be the case. People will say all of these things and it’s usually not as valuable or not a fit. My big advice there is, in no way factor strategic value into your decision. Don’t take an investor that you otherwise wouldn’t, or give someone more favorable terms because the person says how strategic they are. … There have been some areas where maybe we are taking the company in a direction the investor doesn’t like, but if there’s no control, then there’s no fundamental issue. I think that’s very important for entrepreneurs. Things always take longer, they always go in different directions, so it’s important to preserve that and not to assume too optimistically when you take an investor in.
WHAT MAKES A GREAT PITCH?
Angel groups see hundreds of pitches each year. So what criteria do they use to identify the winners in the haystack?
- Endorsements from experts. “I always tell entrepreneurs, if they can come in with a referral from an attorney, from an accountant, from someone in the business community so they aren’t coming cold, it really helps them,” says Ellen Weber, executive director at Temple Innovation and Entrepreneurship Institute and Robin Hood Ventures. Weber adds that it’s important for entrepreneurs to look at their idea as a business. “They are in love with the idea, but they are focused on the idea and not how it’s going to become a business.”
- A solution to a problem. “A lot of these guys think they know what they are pitching because they know their product so well,” says Andrew Chang, co-founder and managing partner at Eastern Foundry. “But when they try to pitch it to a contracting officer or an investor, they pitch it in a way that makes sense to them, but it might not make sense to that investor.” He says it is vital that entrepreneurs figure out what need their product or idea addresses, and clearly communicate how their company can fill that gap.
- A plan for growth. “You have to convey to me that you really understand how you’re going to use my money to get the highest value to move the company to the next phase,” says John H. Cammack, managing partner at Cammack Associates. He adds that the company’s solution must be scalable and have a big enough market.
- A penchant for leadership. “The best presentation I’ve ever seen is an entrepreneur handing out a questionnaire to the potential investors asking what you are going to do for them — why should I take your money?” says Brian Cohen, chairman at New York Angels and founding partner at New York Venture Partners LLC. For Cohen, this strategy demonstrated that the entrepreneur was in control, and for him, this is a crucial aspect of a strong leader.