Takeaway number 1: Angel investing 101
Angel investing is the art of financing smaller startups, with the goal of finding the next big thing,
and in that, multiplying your invested capital by A LOT.
A typical investment would be a company that's less than 3 years old, has little to no product/market fit and which is in desperate financial need.
Most of all, it's not listed at a public market exchange.
Sounds a bit crazy?
The term "angel" in angel investing is used because we are the investors that will finance a firm in its hour of need -
when no one else believes in it.
Sometimes, there's a good reason as to why no one has shown interest in the company yet.
And my business is the squirrel boss - squirrel-proof bird-feeder.
But with Squirrel Boss, if you see a squirrel on your bird-feeder, and he wears out his welcome,
just press the remote control and deliver a harmless static shock correction ...
At other times, the only reason is that people haven't been exposed to the idea yet, or
perhaps they haven't realized the potential of the company. Such was the case with Peter Thiel and his early investment of
$500,000 for a 10% ownership in Facebook.
Today, 10% of Facebook is worth a staggering 100,000x that.
Now you're probably asking:
Why don't you just invest in a business which already has been able to find a customer that is delighted by its product and which
has good finances? Isn't it a bit risky to invest early in a company before it has proven anything?
Well, the simple reason is because most of these companies have already gone public, and in angel investing, we're not looking for such businesses.
Sometimes, if you're truly skillful
(and perhaps a bit lucky ..) you can find a public company returning 50 to 100 times of your invested capital.
If you're truly skillful (and once again a bit lucky ..) in angel investing, even without finding the next Facebook,
you can find a private company returning 1000 to 10,000 times your invested capital.
Calacanis himself had a return in the upper part of this interval when he was an early investor in Uber.
A startup investment, such as Uber, reaching an evaluation of more than 1 billion dollars is called a "Unicorn" among the seasoned angels.
The truth about this type of investing is that most of your investments will fail.
But as the famous businessman and shark tank investor Mark Cuban expressed it: You only have to be right once.
Or, as they say at the poker tables: No gamble, no future.
You must realize that if it was a sure thing, it wouldn't be called angel investing.
It would be called bond or treasury and returns would be measured in single digit percentages.
Perhaps you would never go to the casino or buy a lottery ticket. Me neither!
But what if there's a way to set up the roulette table so that the color you pick is twice as likely to show up?
Or what if there's a way to buy only the top 1% of lottery tickets in the pool? Would that change your mind about gambling?
Takeaway number 2: How to angel invest with little to no money
Most investors starting out don't have enough capital to invest directly in privately held companies themselves.
When such a business needs money, it typically asks for quite a large sum from each individual investor.
The deals that I've seen (and sometimes participated in= have all been $10,000+.
Calacanis gives three options to people who are interested in starting this type of investing, but doesn't yet have that kind of money.
1. Advisor/Broke Angel. If you have a specific skill that a start-up could use, like
marketing, coding or perhaps designing, you could be an advisor for it.
If you have a network that could be useful, you might even get a seat on the board.
Both types of work are usually rewarded with shares in the startup.
People doing this are referred to as "Broke Angels".
Just remember, you will be trading a significant amount of time to get your shares.
2. Employee. An employee is like the advisor, but will dedicate even more of his personal time to one single company.
This is sometimes rewarded with stock options, which could be very lucrative.
But it's difficult to be an employee at multiple startups at the same time, so your options will be limited to one single company.
3. Syndicate Member. The third option is to become a member of a so-called "Angel Syndicate".
This is also the option that Calacanis recommends as it allows for diversification among many different companies, increasing the chance that you'll find that Unicorn.
When you become a member of a syndicate, you add your money to a pool, which is then being invested by the syndicate lead.
It's like a mutual fund, but for angel investing, and with one critical difference - you get to decide which deals that you're in on.
The syndicate lead typically takes
15% of the profits for doing the work of finding the right companies and doing all of the boring legal stuff.
This charge is called "carry" and the term comes from back in the days when captains of ships
charged merchants for taking the risk and carrying cargo around the world.
Minimum investment here is usually $1,000-2,500,
which is a lot more realistic to reach for the average investor.
Here you can find a selection of angel syndicates if you're interested:
Angel List @angel.co
Seed Invest @seedinvest.com
Funders Club @fundersclub.com
Disclaimer: Calacanis himself operates one of the largest syndicates out there and makes this recommendation. I think it's still sound advice though.
Takeaway number 3: Develop a large network
The best deals don't come from platforms like Angel List or incubators like Y Combinator or 500 startups.
The best deals never see daylight.
This is why you as an angel investor must use your network.
I bet this is the point where you say "hold on a minute!"
"My friends just finished college. A few of them still play computer games from their parents basement!"
"How are they possibly going to be able to show me the next Facebook?"
Correct observation ...
None of your current friends will probably be able to help you in your pursuit of finding the next unicorn out there.
Lucky for us, there's a new invention out to help us solve this problem: The Email!
Once you've invested in your first few deals through a syndicate, you should create a spreadsheet of the co-investors in those startups.
Send each of them a message on a platform like Twitter or LinkedIn, with this structure:
"Hey Sven, we're co-investors in Daniel Ek's Spotify!"
After that, stalk them a bitch - retweeting what they write and like their posts.
I mean, come on! Everyone loves to be popular in the world of social media!
The people who seem to be the most interested after this process qualifies for the second step - the email.
Send them something like this, as an invitation to meet up with you.
Emphasize that the meeting will be short as you know how very very busy they are.
Also, make sure they know that you are flexible when it comes to the meeting location.
During your meeting. You should focus on the following 3: 1. What do they invest in, and why?
2. If they've seen anything interesting lately?
3. Offer them value by presenting the top investment that you have in your portfolio right now and ask if they would like to meet with the founders.
Your goal should be to meet with at least 60 co-investors during a month or so. After this month,
you've officially changed your status from outsider to insider!
Takeaway number 4: Invest in the founders - not in the company
You don't need to know that the idea will be successful.
You only need to know if the founders behind it will be. Ask yourself this:
"Would I buy stocks in this person if I could?" Here are 10 things to look for:
1. Wildcards
Great entrepreneurs are unmanageable and have 100% clear vision and belief in their coming success.
There's a difference between being delusional and completely mad though. You must learn to understand the difference.
2. Big thinkers. They think that their ideas will revolutionize the world, or at the very least the industry that they're in.
3. Sweat equity
Founders that have acquired their first customer and built a product without the aid from outside investors typically have great potential.
They are proven that they are capable of being productive even without funding.
Imagine what will happen when you provide them with oil to their machinery!
4. Self-funding. The risk should be shared among founders and investors.
Therefore, it's a great sign if the creators themselves have a large stake in the company.
5. At least two founders. This is kinda like diversification.
As the saying goes within the investment community:
"Don't put all your eggs in one person". He'll die from a cholesterol overdose.
6. A Sh***y office
Yes, you heard me. Founders that are willing to spend their scarce money on a fancy-looking office, shouldn't be touched even with a protective suit on.
If you, on the other hand, see folding chairs and old doors used as tables, you know that you're onto something!
7. Self.experienced problems
Make sure that you know why a founder has started the company. If they say:
"Because I think it will be great money!" and they're sincere, not just ironic, you should stay away.
The best ideas come from self-experience problems. A great example is that Travis Kalanick
and Garrett Camp built Uber because they couldn't find a cab in Paris.
8. They know "why now"
Great founders know why the market is ready for a product like theirs now, and why previous attempts have failed.
Basically, what will be different this time?
Google wasn't even close of being the first search engine and Facebook had countless of social networks try and fail before them.
9. They have an unfair advantage
Do the skills of the founders match the mission they take on? Or perhaps they have a network that can make them succeed?
10. They aren't wasting time at fancy events
If the company is spending money so that the founders can attend to cool events, such as TED or TEDx, stay away.
In the early stages of a start-up the founders should give 100% of their attention in landing the TIC: Team members,
investors and clients.
Takeaway number 5: Get great at saying no
You're going to have to meet with a lot of startup owners to find the ones that are worthy of your funding.
Implicitly, this also means that you're going to have to say "thanks, but no thanks" to a lot of enthusiastic people.
Rule number 1 is that you should never say yes or no during the first pitch meeting with a founder.
Always tell them that you need some time to consider.
Remember - startup originators are (or should be for you to invest in them) persuasive in their nature.
It's much easier for you to take a rational decision about a potential investment when you are being miles away from them.
Also, you look impulsive if you say yes during a pitch, and an angel must have a reputation of being wise and methodical.
Although this is just a rule of thumb,
you should aim to invest in 1/25 of the startups that you visit. To acquire a well-diversified portfolio of about
30-50 startups - again, remember that investing in private companies is much riskier than public stocks - you'll therefore have to say no
720 to 1200 times!
So ... here are two ways to express yourself without breaking the poor founders hearts:
"This startup doesn't fit my investment thesis" or
"Not yet." Be careful about using phrases such as:
"Let's keep the dialogue open" or "I'm just going to check with my partners". In the ears of a founder, this always translates to:
"F**k yeah! Can you just hold on for a few days while I gather some more capital?"
"I'm putting up my house, car and dog on eBay as soon as we finish this meeting!"
Because of this, your best option is probably to go with one of the two mentioned before. "Not yet"
is especially useful as it will light up a fire in the belly of a founder.
They'll think "I'm gonna show that guy!" and as you implicitly stated that you could be an investor in the future,
they will keep you in the loop. WIN-WIN!
There are a lot of other important takeaways, such as when
Calacanis states that Sweden is the greatest place in the world to angel invest in, second only to Silicon Valley.
Some authors makes it truly difficult for me to filter down to only five takeaways!
Anyways, let's hear it from you guys! What's your impression of angel investing?
Do you consider it an alternative to the stock market, or do you think that it's too risky?
Thanks for watching! Until next time!