As I approach the first anniversary of my initial foray into angel investing (and having recently made the decision to devote more of my time to it) this piece is designed to look back and reflect on my experience. By its nature this is a personal review, but perhaps aspects of it might be interesting for others considering starting out in angel investing.
I entered the world of the angels with almost 20 years of experience in the global asset management industry, but what has been interesting is how much my beliefs have been challenged in this time. If anything, this past year has only served to illustrate how much I have left to learn!
So, what are some of the key takeaways from my first year?
- Network: super important, but developing it has been a pleasant surprise
- Time: There is never enough of it, particularly when there are so many deals that interest me. I have learned that you need to stay focused to devote sufficient time to each opportunity
- Plan: early on I devised an investment methodology/philosophy, and there are endless merits to be had by sticking to it. But at the same time, make sure it’s constantly being developed and improved upon
- Learn: the importance of reflection and being self-critical of everything you do cannot be overstated
- Valuations: this has been the trickiest aspect to get comfortable with. Simply adding a ‘tech’ suffix to an industry should not be an excuse for inflating valuations
- Tax benefits: EIS and SEIS are wonderful from an investor perspective, but they don’t make bad deals good
Let me go into what I mean in a bit more detail.
In brief, develop one! Ultimately, good deals are going to come via channels (individuals, organisations) you know and trust. They aren’t going to simply fall into your lap.
One of the most pleasing aspects of my year has been how incredibly generous people I’ve met have been with their advice, time and willingness to introduce me to their contacts. This has been like a breath of fresh air for me, and there is a real sense of ‘community’ amongst angels and startups.
The importance of developing a network should not be underestimated. If nothing else, having someone else to bounce ideas off can help any investment decision. And it can be much harder to convince a third party of your investment call.
Perhaps the most precious commodity of all. Early on it was so easy to look at too many deals – everything just seemed to be so interesting! I’ve calmed down now and begun to cultivate a sense of focus.
I estimate that for each deal I’ve done to date, my due diligence has totalled around 15 hours of work across management calls and meetings, documentation, market studies, etc. To me, this still feels too light for comfort, but the reality is that we’re often operating in something of an information vacuum and relying on an entrepreneur’s judgement as to how a new market will develop. But all the due diligence reports in the world are not going to give you the answer to that one.
Have a plan, be disciplined and just say ‘No’!
As a result of (or maybe in spite of) my background in investing, one of the first things I did was establish a plan of attack for looking at opportunities. This is just a simple due diligence checklist, but it has been an invaluable reminder of the importance of having a process and sticking to it.
As a result of the time issue noted above, I’ve also been very diligent about saying ‘no’ to deals that I don’t believe I will ultimately be comfortable with. I think we, both the angel community and entrepreneurs, have an obligation to be honest and upfront with the feedback we provide. I don’t want to waste anyone’s time and I certainly don’t want my time to be wasted.
‘No’ should always be the default answer, unless you can genuinely convince yourself otherwise. Never be afraid to walk away from a deal.
Learn from your mistakes
So, I have the plan. And the time. What next?
The striking thing about the past 12 months is that it has demonstrated how much more I have to learn about investing in general and the startup scene specifically. It’s a fantastic challenge, and endlessly fascinating, but I’m going to make mistakes along the way. Indeed, I already have (but that’s another story…).
The important thing is to learn from those mistakes. Refine the plan, incorporate that learning and make better investment decisions in the future. Easy, isn’t it? If only…
After every deal we need to ask ourselves: what worked? What didn’t? What did I miss? Was I just (un)lucky? This last point is the hardest thing to evaluate – was this great deal because of luck or good judgement? Without any exits (or failures!) to date, I’m as yet unable to comment.
A thought on valuations
I have heard it said that your entry valuation matters less than picking the winner in the first place. Whilst I absolutely concur that picking that winner is the ultimate goal, simple maths dictates that a lower entry valuation improves your returns. Or, to be a bit more prosaic, it increases your margin of error and improves your chances of getting ANY of your money back.
It has certainly been a challenge approaching the valuation of an early-stage business, but it can be done and an angel should be prepared to walk if they cannot get comfortable with the valuation. My sense is that this needs to happen more often so there is a note of realism injected into the market. This is where the role of the lead investor becomes very important to ensure fairer valuations.
There’s an ongoing debate about asset bubbles and whether we are seeing inflated valuations at the present time. My sense is that we probably are and there is clearly a lot of exuberance in certain sectors. Some of this is possibly warranted (Fintech, for example, has the potential to be genuinely innovative), but simply adding ‘tech’ after an existing industry is not an excuse for bumping its valuation still higher.
To be sure, EIS/SEIS are wonderful schemes. I sincerely hope the government recognises the benefit they bring in attracting startup capital and that they don’t change in future budgets. However, tax breaks do not make bad deals good; they only protect some of your downside and serve as a boost to portfolio returns. In evaluating deals we should only ever be looking at gross returns – the tax benefits are simply the cherry on top!
I hope this reflection has been interesting, but most of all I want to make clear that this past year has been a lot of fun, and it has given me the privilege of meeting several interesting and genuinely inspiring people. I would urge anyone considering angel investing to give it a whirl.
Anyone wanting to debate any of the aspects I raise above should feel free to get in touch. All in the interest of expanding my network, naturally!