If you want to dip your toes into the exciting world of angel investing, becoming a member and/or investing in an early stage fund is a great way to start. But first ask yourself the following key questions.
How much time do you have to commit to angel investing?
Angel investing can be as active as you like including attending pitch nights, attending follow-up meetings with prospective investee companies, reviewing investment opportunities, mentoring entrepreneurs, undertaking due diligence, negotiating deal terms or really rolling up your sleeves and joining the board of a start-up post-investment.
If you have limited time to dedicate, you are best off starting with a fund; all the deal prep is done for you, the investment decisions are made for you, and you are provided with summary information to keep you abreast of the status of the fund’s portfolio.
What type of deals will you invest in?
Angel investors tend to invest in what they know and understand, which makes a lot of sense. Obviously it’s difficult to get a diversified portfolio if you only invest in what you know – we have some very smart investors, however it’s impossible to be an expert in everything! It’s a good idea to invest directly in companies you know and understand and invest in an early stage fund to diversify your portfolio.
It’s inevitable that Angel investors skip certain deals because of their lack of time to review due diligence reports, or because a particular investment was outside of their expertise. 18 months later it’s the company that returns 4x+! Murphy’s law? More like exit envy!
Only 18 Enterprise Angels investors invested directly in SwipedOn (2.5x return in 12 months), but EA Fund 2 invested in SwipedOn, so all Limited Partners received some money back (63 investors).
On the flip side, there are the investments that will fail – totally – with no money returned. Angel investors understand that this is a possibility and that is where a portfolio really comes into its own.
If you have made one or two startup investments and one (or two!) of them them fail totally, odds are you are likely to give up and write off angel investing. If one of the companies fail and it’s part of a portfolio of 15+ investments, the overall impact is reduced significantly.
For example, EA Fund 1 invested in 16 companies, 2 of which failed, however the IRR is still 12% and the portfolio holding value is about 1.4x cost.* Of course, that is no indication of total returns/cashback, but there is a group of strong companies remaining in the portfolio making a global impact, so we’re quietly confident.
How much should you invest?
Determine roughly how much money you want to invest in start-ups (no more than 5-10% of your wealth). Note, this should be money that you are prepared to lose if things go belly up in everything you invest in!
To figure out how much to invest in each deal, divide this number by 10 (the absolute minimum number of companies you should invest in to help spread your risk, although 20+ is recommended). Next set aside 30-50% for follow-on funding – start-ups often need multiple rounds of funding as they reach certain milestones and grow value – it’s best to reserve this funding for those companies that are meeting goals and objectives.
The final number you come up with is the parcel size you should initially invest in each deal.
How does an Angel Group help?
A key way Angel investors mitigate risk is to invest with other Angel investors. Actively assessing investment opportunities together (screening and completing due diligence) and guiding investee companies post investment can substantially reduce risk. This is where an Angel group can help.
You will be given the opportunity to attend pitches, follow-on investor meetings and due diligence meetings. If an opportunity arises where you have the specific experience required, you may take the opportunity to work on the due diligence team or even become part of a Board. While formal courses and access to industry statistics and best practice is very important, the best way to learn is by actually working on deals with others.
The camaraderie and networking opportunities that Angel members enjoy are also highly valued. Members can draw on each other’s specific industry expertise to evaluate opportunities. Pitch Nights provide an opportunity to hear about new investment opportunities, meet with entrepreneurs and mingle with other members. Potential investments are discussed collectively and issues and advice are freely exchanged in a totally confidential environment.
For Bay of Plenty and Waikato based investors, or investors that prefer remote access to deals (recorded pitches/zoom conferences etc), check out Enterprise Angels. For other regions, find your local Angel Group here.
How does an Angel Fund help?
An Angel fund pools money from investors (typically paid in over a period of time rather than all at once) and does all the work involved in finding and investing in multiple early stage companies. The number of companies a fund invests in depends on the fund’s investment mandate and size.
The fund manager typically charges a fee to pay for the ongoing management of the fund. A 2% annual fee is typical in New Zealand.
Investing in a fund allows investors to build a portfolio of early stage company investments with less money, personal time and effort. It also provides access to high risk, high reward parts of the market, investing alongside experienced early stage investors.
Different funds will have different structures and mandates, so be sure to read the Information Memorandum and understand how the fund works. An example of an early stage fund is EA Fund 3, a side-car fund that will invest in a minimum of 15 early stage companies. To find out more about EA Fund 3, click here.
For more resources and information on Angel investing, be sure to check out The Angel Association of New Zealand, where you will find a glossary, templates, reports and many other useful resources.
*At 31 March 2019.