Jiva Technology

8 observations on angel investment

Angel investing is a funny thing. Superficially, it’s about money or more specifically, the attempt to make a better return by taking on more risk. You manage that risk by spreading your investments and never putting too much into any single investment. Folk wisdom suggests that most of your return will come from one or maybe two of your investments at best and that a high percentage of your ‘bets’ will be lost as the business goes bust. Angel investors tend to be viewed as dumb money by the professional investment community, but at a macro level, angel investment is incredibly important as it helps to create new companies and new jobs; occasionally throwing off the sort of high growth, high value superstars that every economy needs.

I’ve been investing in early stage or even brand new companies for some 15 years or so now and whilst I don’t necessarily follow the standard rules of the investing road (I tend to invest more in fewer companies), my own experience tells me that the ‘rules’ are probably not as hard and fast as you might think they are when it comes to early stage investing. Here are a few of my observations:

1. What it isn’t. Angel investing is not a smaller version of VC investing, it’s completely different. Founders and angels can make really good money on a company that they sell for $20-30m. VCs are looking for a few big pay offs. I think this is a major source of confusion; many people believe that angels fund a company until the ‘professionals’ come in and inject the big cash. Most of the time, sophisticated angels can make more money by helping a company through to break even and then selling or floating the company at a sensible price, rather than hanging on for the outlandish pay day.

2. Risk. The biggest risk for an early stage company is running out of cash. It’s that simple. Patiently building a company with a relatively small amount of cash isn’t that exciting, but if the company has a real product and the management team are competent, it’s relatively low risk. To get massive growth rates requires huge investments in people, tech and marketing. The problem is that if the growth rates either don’t appear or tail off, there is only one result – death.

3. Understand what you are trying to do. If you think it’s only about the billion dollar exit, understand that only about ten companies or less per year make that hurdle. Worldwide. You have a very low probability of making that. The good news is that you don’t have to, because lots companies make it to the $30-50m threshold.

4. Information. One of the curious things about early stage investment is that you can get an awful LOT more information on the company than you can on a company listed on the stock exchange. You can get financial statements more often, you can meet the people who run the company, you can meet customers, you can assess in detail the utility of a companies products. There are plenty of listed companies where you will have no clue as to the actual financial health of the company (banks are my favourite example). And yet, we perceive the listed company as being of much lower risk. Most people either can’t or won’t put the effort into really understanding a new company’s business, but equally, should we kid ourselves that we understand a business, simply because we’ve heard of it?

5. Common sense. Apply it with maximum ferocity at all times.

6. Ego. If you have one, it will make you over confident and a bad investor. If the management team has one, it will make them poor custodians of your money. The ability to separate the confident and the capable from the merely egotistical is a really important part of angel investment. People are the area where the biggest mistakes are made.

7. The limits of portfolio investing. The effort required to analyse each angel investment is very high and it takes a lot of time. I have never understood why it is riskier to have a few investments that you put a lot of time into than it is to have 10-15 investments that you have put a little bit of time into. It’s why I have always managed to break the portfolio rule and never had more than 8 investments at any time. One of the great things about being an angel investor is that you can diversify risk elsewhere; you can have 5 start up investments, a buy to let and a cellar full of wine. VC funds can’t do this.

8. £25,000. I read somewhere that this is the average amount an angel invests in each company. Understand that you you’re making zero difference to that company. You need to put in £100,000 minimum. Just saying ….




Regus House
1 Friary

Temple Quay
United Kingdom