The 4 Keys to a Successful Angel Investment Strategy

With the increasing popularity of angel investment sites such as AngelList and CircleUp more and more people are making investments. I love this trend and have a longer form blog coming on the subject – which I think is massive positive force in the startup ecosystem. But this post is much shorter and to the point.

I often get asked what my thoughts are on angel investing. Here are what I think are the 4 keys to a successful angel investment strategy:

1) Take a portfolio view of angel investing- put aside a pool of money and plan to make 10 or more investments. One-offs simply don’t make sense in this market (too much alpha)
2) Be willing to lose all your money (and assume you will) – mortality rate at the angel stage is extremely high
3) Be passionate about either the team, the idea or both. You should be in love. Angel investing is about emotion, not logic.
4) Don’t reserve/follow. Your job is to put in seed capital. The company’s job is to grow the business and find new capital. They either do this and are successful or don’t and you write it off. I don’t think it’s wise to play the pro-rata game at the angel level.

  • MrScrewupGuy

    Great post.

  • Guest

    HI Seth, I tried to fix the RSS feed to your blog—always end up getting http://feeds.feedburner.com/VC_Adventure and it’s Brad’s posts coming through (I’m using Digg Reader)

  • Kelly Hwang

    Hi Seth, thanks for the post. Can you elaborate more on point #4 on why not to follow on when the company is doing well? Thanks.

    • Just saw this Kelly (from 8 months ago!). Sorry. My personal view (although this is clearly up for debate as other angels have a different opinion) is that your money is best spent seeking out new opportunities. If a company is doing well they should be able to attract new capital at attractive terms. You generally buy up so little in these later rounds, that you are better off finding new Seed deals to do vs. doubling your investments by putting money into later rounds.

      • leovmt

        Hi Seth.. long tail (in time) comments on this topic hehe….
        But then if the company is doing well (and thats the reason why you have the option to do pro rata) and growing fast, it probably means it is returning high IRR on your cash, and also most likely it is beating other investments… therefore you would want to double down on it right?

        • Good time to address this as my thinking has evolved a bit on it. I’m not more in your camp. While I think the default should be not to double down, I do think if you have an opportunity to put more money into companies that appear to be on a winning path you should do that. But be careful how this effects the overall balance in your angel portfolio. Breadth and exposure are still keys here and if you sacrifice that for the sake of doubling down I think it’s a mistake (i.e., my order would be breadth first, then double down, not the opposite). How does that sound?

  • Victor Charles Roskowski

    So #4 means that if you invest in a business and they go belly up you can write it off and get your money back?

    • Tax treatment here depends on your personal factors. What I’m saying in #4 is that my personal view is that your job is to make a number of good investment decisions. If the company is doing well and new investors come in that’s great. Personally I’d avoid the temptation to double down and concentrate that capital on making new angel investments. This is up for debate among angels, hwoever…