Angel investing isn’t for the faint of heart. Doing it right takes patience, acceptance of risk, and the knack for spotting entrepreneurs who can work together as a team.
Those were the major themes at a panel discussion Monday that was part of the first day of Boulder Startup Week. The panel, titled “Trouble in Paradise: Lessons from Angel Investment and Capital Raising Failures,” featured Foundry Group managing director Seth Levine; VictorOps co-founder and CEO Todd Vernon; Impact Angel Group managing director Elizabeth Kraus; and Victors & Spoils co-founder Claudia Batten.
The panelists provided some dos and don’ts for people interested in angel investing, as well as tips for entrepreneurs. Here are some lessons taken from their talk:
For investors:
—Know the risks and manage them
Angel investing is risky business. Most startups that get angel capital fail without ever returning a cent to their investors. If potential investors can’t cope with that knowledge and still write sizeable checks, or lack the financial wherewithal to sustain large losses, they shouldn’t be making angel investments, Vernon said.
Vernon said he’s made about 10 angel investments and had one or two successes. His track record in founding companies is much better: he co-founded Raindance Communications, Lijit (now sovrn Holdings), and VictorOps.
For those willing to take the plunge, Levine, who said he’s made about 30 personal angel investments, offered a few pieces of advice. One is to take a portfolio approach with at least 10 or so investments. That increases the odds of a success or two, but it doesn’t guarantee it, which leads to his second point.
“You need to be ready, willing, and able to lose 100 percent of your money,” Levine said.
He also recommended not seeking to follow on in subsequent rounds, and he emphasized the need to be “super passionate about the team, the idea, or both.”
—Don’t obsess over due diligence; focus on the team instead
Investing the time on extensive due diligence might seem prudent when you’re putting up $25,000 or so in a company, but Levine said it’s actually counterproductive and bogs down a startup. The founders’ time would be better spent refining their product and courting customers than dealing with umpteen requests for information from potential investors.
Batten was even more blunt about over-involved investors creating headaches.
“Angels waste a lot of entrepreneurs’ time with question after question about stuff that is irrelevant,” Batten said. That’s especially true because the company is almost certain to change course dramatically after an investment has been made, making the answers an entrepreneur gave at the time irrelevant.
“All of the companies I’ve been involved with started in one place and pivoted significantly to someplace else,” she said.
Focusing on the qualifications of the founders and their interpersonal dynamics is a better clue as to whether a startup could succeed, Levine said.
“The right thing to do is find really passionate people that you are very passionate about that are doing something in a market you think is at least interesting,” Levine said.
Most startups that fail at the angel level do so because
