Angel Investing Basics - Insights from Y Combinator's Angel Conf

It's very hard to distill insights gained on angel investing over a period of 3 years into a talk of just 7 minutes. So I thought it would help to re-summarize those lessons in writing. Here's a pretty comprehensive list (though not exhaustive) of what I think is key to be a good angel investor:

• Pick a Goal - Picking a goal as an angel investor is important: decide if this activity is a hobby, philanthropy or the next professional step in your career. Maybe it's one or all of those, but it affects the outcome and your investment style.
• Pick a Focus - Everything else being equal, investing in an area of expertise, based on a field of experience or knowledge is key in reducing the risk while increasing the chances of success. It also allows you to know your segment and your companies better than others.
• Be Social - Woody Allen once said that "90% of success is showing up"; the best foundation of angel investing is a solid personal network, which is ideally built one connection at a time. It's also important to always be nice & helpful to the entrepreneurs as well as your co-investors, referrals produce often the best investments
• Be Transparent - It's OK to pass on deals, in fact, it's necessary to decline a lot more investments than proceeding with them. But doing so in a transparent, timely, helpful and polite way is very important.
• Be Different / Build a Brand - There is no shortage of capital, even in this economically challenged times we're in. Putting in the extra effort and paying attention to details will pay off big over time. Building a strong personal brand is key to attract the best entrepreneurs and have them choose to work with you. It's also key to creating a "proprietary deal-flow" which is the most important success factor in angel investing
• Understand and Pay Attention to Terms - At times this could be the difference between losing your investment and generating a positive outcome. While lawyers can help here, so can being part of a reputable, professional and good investment syndicate
• Use numbers to your advantage - having a portfolio of a reasonable size (larger than 10) is pretty essential in several ways:
  • it helps spread the risk
  • if you are helpful to your portfolio companies, their teams become your champions. The more companies and people speak positively on your behalf, the higher are your chances of discovering extraordinary founders and start-ups
• Have fun - Enjoying what you're doing will reflect positively in your attitude. Working with founders you like on ideas that make a difference and seeing those companies grow can be extremely rewarding. Enthusiasm is contagious.
• Know that it's not a picnic - A great portion (1/3 according to Ron Conway) of the companies in your portfolio is likely to fail; in fact it's expected. Remember this is about making bold bets, and with those come often losses, and the pain of seeing companies close their doors. Tolerance for losses is a necessity not an option.
• Pattern recognition / Supply and Demand - Seeing a very high number of deals and having a portfolio is key in training your pattern recognition. Angel investing is not an exact science, it's an art. The best way to perfect that art is exposure to as many data points as possible. Equally important is understanding that with most early stage investments, data is scarce and information is opaque. So valuation is often determined by the supply and demand. However, popularity of a deal is rarely correlated if an outcome is positive or not.
• Structure - If you're doing angel investments professionally, structure might be important. Make sure to look into decent legal help regarding forming a legal entity to make the investments through (for liability reasons), or putting the investments in a retirement plan for future tax benefits. These details might not be obvious at the onset, but might become critical later on.

Comments

[Dave]

great stuff aydin... really liked your talk, and your emphasis on 1) being social, and 2) being more international. both are areas where i also share interest :)

[chris mccann]

Here is the AngelConf video from Justin.tv including a transcript and notable quotes I wrote up from all the speakers check it out http://tinyurl.com/d8tpzd

[Don Sabatini]

Good post. Thanks.