6 Things I Wish I’d Known Before Becoming an Angel Investor

While there is no one secret to the perfect angel investment, and achieving a 10%-20% success rate is part and parcel of the game, basic mistakes can be easily avoided.

I’m not an investment guru by any means, however, here are six things I wish I had known before starting on my journey as an angel investor:

The team is what makes something worth investing in

Whether looking for your first or fiftieth venture, you're really investing in the founder(s) and their team. Think about their character, resilience, determination and creativity. The plan will be wrong, so the team's ability to stay open, run toward the weaknesses, and adapt, will be one of the things that determines success or failure.

Beware of experience

This may seem strange. While many view experience as equal to guaranteed success, I would argue that you should also be wary of it. Too much experience can also lead to orthodoxy - getting stuck on the "way things work" and failing to ask the silly questions that can unlock new angles. If you’re looking for a disruptor, experience won’t necessarily ensure this.

For example, I am currently working with a young guy who is extremely smart and tenacious. He doesn’t have much of the “typical” experience in the world of business, but is exceptionally successful with what I like to think of as ‘informed inexperience’. While many may call this naivety, I figure if you don’t know the rules, you don’t know you’re breaking them, and you are bound to shake things up. I know and trust he’s smart enough to work it out along the way.

He’s been successful so far and will keep teaching me ways to see outside of my own orthodoxy well into the future, I’m sure.

Take time to study and learn the mechanics of how investments work

I did not understand the basic mechanics of investment well enough when I started. I was like an excited kid when signing into investments, but a bit more research could have easily mitigated a lot of risk. Nowadays, it’s as simple as watching a few videos on YouTube or completing some courses.

Here’s a checklist of investment basics that you should know, which is by no means exhaustive:

• Know what the different types of raises are. There’s a difference between a SAFE (short agreement for equity), a convertible note and an equity raise, or Priced Round. Make sure you learn the benefits and disadvantages of each, so you know what investment you’re signing into.
• Understand valuations, eg. pre-money, post-money, and what those two things mean, and how subsequent raises can dilute you.
• Have a point of view on how to value value your future exit and calculate the likely multiple between the pre-money valuation and that exit, taking into account future dilution. It will not be right, but having at least a directional view will help you sort the potential rocket ships from the oil tankers.

Have an investment thesis

As an investor, you shouldn’t be opportunistically bouncing around a pinball machine, grabbing hold of something that happens to be in front of your nose. It’s more helpful to have an affinity with a particular industry and a point of view on the future of that industry, so you can spot valuable disruption.

By looking through that lens, you will be a more informed investor and make better decisions.

I’ve learnt that the numbers are almost always wrong, so you really need to be anchored in a thesis of where the world is going to make a strong investment.

Think about intelligent collaboration

Many studies show that having a collective-mind and a diverse team will make for better decisions, whether in business or beyond. Investment could be a solo sport, but it can also be a team game, and there’s real intelligence in the hive-mind.

I am part of an Angel investor group of 10-15 individuals who come with their own experience, skills and personal capital. We host 3-5 start-ups to present their investment pitches each month. The benefit of this collaborative pursuit is that we help each other make considered and informed decisions based on our wide knowledge of different markets. By helping each other out like this, we are able to evaluate investments and make wiser decisions.

I’d recommend joining one of these groups, or using the wisdom of your network to inform your ventures.

Look at your network

As with the above, make sure to use your connections to help the businesses you invest in. There is real power and value in thinking laterally across the network that you have, which could take place in a number of ways.

First is to use the knowledge and skills of the people in your network - they want to support you! We’ve all got friendships, collegial relationships, former colleagues or bosses that could be of huge help when dealing with businesses.

Second is to connect the start-ups across your investment portfolio. If you feel two or more businesses might benefit from each other’s help, you can introduce them for a common purpose. Young businesses and start-ups need to continuously reevaluate and re-orientate to adapt their plans, and having a lateral network to feed from is a great advantage.

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Developing an investment thesis, understanding the basic mechanics and teaming with a network may take some time, but it will save you time and money in the long run. I will never claim to be an investment expert, but I hope these tips help anyone looking to take that next step and invest in a business. Take it from someone who didn’t do all the above - it’s worth it.