Portfolio Management & Group Investing

You have now written your first check as an angel investor, and you are officially a member! That does not imply you are a good one just yet. It all depends on the option you pick. Early investors in Google enjoyed a return of 1000X, while eBay investors reaped a return of 1500X. Statistically, there is only a 0.00067% chance that the first firm you pick will become a unicorn; make sure not to put everything in one basket. The game has just begun, so it Is time to talk about how to construct your portfolio.

Steps in Portfolio Management

Allocation of Assets

The initial step is to decide your asset allocation. This means determining the total value of your assets, which encompasses your house, possessions, equity, businesses, and money. For this example, we will assume that your assets are worth $10 million. A reasonable amount to invest in early-stage companies would be 10-15% of that–so you would have $1 to 1.5 million dollars available for angel investing.

You need to allocate the funds for a specific target frame of time. A good amount of time would be five years. For example, if you were investing $1 million over five years, you would have $200k to invest per year. At a rate of $25k per startup, you could onboard eight startups per year.

It is crucial to remember that not every startup requires the same amount of funding, although it is important to steer clear of concentration risk. Diversifying your portfolio is one of the most key aspects of angel investing, something we have seen time and time again from Angel Investor Schools ambassadors.

Adopting a Portfolio Mindset 

You were asked to invest in Uber back when it first began. You may believe you missed your chance. If you see a lot of opportunities and have clear criteria for what to invest in, you will thrive as an angel investor. 

The aim is not to expect high returns of 1000x or more; instead, it should be sought after high returns of 20x to 50x because they are improbable while necessitating an intense focus on just the winners. Keep in mind that not every firm you invest in can become a unicorn.

Playing the portfolio game can make you more content with your decisions. Inspect many offers, and then select the ones you appreciate the most.

In conclusion, make sure you invest in various businesses, following a portfolio strategy and remembering that the founders are the firm’s most valuable asset at this point. And remember to expect to lose money on at least half of your ventures. 

Fabrice Grinda explains that he has lost money in 50% of his deals thus far. So far, he has invested in about 600 enterprises and acquired 200 exits while retaining 100 firms. These are outstanding numbers for an angel investor, but they still show a loss in half of his transactions.

Considering the Total Number of Investments and the Amount

A common question people have is how many companies they should invest in to avoid being over or under-concentrated. The answer to this will depend on the individual’s circumstances, such as how much money they have available to invest and whether or not they plan to add value to their companies. If an investor only has $25,000 and does not plan on adding value, it is probably not worth their time because the amount of skin in the game is insufficient.

Diversifying

Diversification protects investors by reducing their exposure to any particular asset or risk. By investing in a variety of assets, the volatility of an investment portfolio is reduced.

Asset investing in early-stage companies necessitates a diversified portfolio. The outcomes are incredibly volatile. You must not only psychologically and emotionally prepare yourself for it but also mathematically. It implies that a tiny percentage of your investments will make up the difference. When you total it all up, those investments do well.

Creating an Investment Plan

Investment plans have been quite frequent among venture capitalists, but we are seeing more and more angels developing their own and releasing them publicly. An investment plan is a statement that describes an investing technique based on a study, research, and logical reasoning.

In the world of venture capital, a general partner, or GP, creates a formal document known as an investment plan to present to other potential investors how they plan to spend their money after raising a round. 

We believe angel investors should undertake this activity as part of their due diligence. Creating an investment plan requires a vision of the future and an interpretation of market dynamics.

An angel investor must be precise about the most significant components of an investment hypothesis. For example, whether they are investing in firms that are at the concept stage, in the market validation phase, or in their company’s expansion. 

Several phases exist for various investment theories and sectors or regions across countries. As a result, an angel investor must evaluate numerous variables of potentiality according to the fundamentals of an investment plan:

  • Creating a process
  • Should you exit before or after the profit target is hit?
  • When is the best time to invest more money into your current investment?

How to Write an Investment Argument

It is relatively simple to set specific requirements for your investments, such as the size of the firm you wish to see and how much money you spend on each transaction. However, it is difficult to determine which sectors will be the future winners and what will happen to them. Futurology may come in handy.

Knowing When to Sell Your Investments

When leaving an organization, different angels will recommend varied techniques. Some prefer to profit from their gains and move on to new investments as soon as feasible.

People like Dan Scheinman think that holding for a long time is best.

This is a very risky type of investment. It takes a long time to build up any significant returns. When you are thinking about how to construct your portfolio, an angel investor should be prepared to wait 7-8 years before seeing any major changes. For comparison, venture funds typically have 10-12 year structures.

Because investing in startups is a very illiquid asset, investors need to be ready for that fact. For any one startup, there are not many opportunities to sell. It is not the same as buying stocks or owning commercial real estate, where you would list it on the market when you want to sell. With private company shares, it is not easy simply to put them on the market.

In any business, there are only a handful of times when you could either buy or sell shares. With such little opportunity for selling, what should you do when the time comes? Should you sell? Hold? Or maybe even buy more shares? In most cases, selling or holding onto your current number of shares is the best option.

It may have been a long time since you made your investment, and the firm has evolved. So, how do you know whether to keep or sell your shares? A simple hybrid strategy, such as selling a portion of the shares, might work in this instance, especially for firms valued at $100 million to $1 billion private equity value. When Techstars has organic liquidity possibilities, it will frequently consider selling a quarter to half of its position to hedge its risk.

Selling half your position ensures that you will not be considered a total idiot; at worst, everyone will think you are only half an idiotic. And if things have gone really well, then you can bank on a win. You are getting liquidity while still letting something ride; it is the best of both worlds. We believe this is an excellent approach–especially for potential new angel investors like yourself.

It is possible to use this hedging strategy for training as well. Investors may observe the final result of that firm; you are still a part of the story and can follow the conclusion. This means waiting until secondary and private liquidity possibilities arise or when a firm goes public, and its stock becomes tradeable.

Then, at that point, you have left the sphere. You have a public asset and should think about it in the same manner as you would stock trading. As an angel investor, you are probably done unless those shares seem to fit your public investment strategy.

What if Your Portfolio Is Divided Across Several Industries?

New angels should invest in a few connected sectors to create value synergy in the portfolio. Although investing across various sectors is okay to create diversification and lower the impact of some events happening in the economy, investing specifically in one industry makes an angel more professional–an expert in that sector. Also, the potential ability to add value and stand out from other angel investors is much greater if focused on only one industry.

Group Investing 

One of the many methods available to co-invest and learn from others is a fantastic way to begin your angel adventure, especially if you are unsure how to find or evaluate deals. You do not necessarily need to come from one particular angel investment to develop your reputation and portfolio. It is becoming increasingly more frequent for investors to co-invest; therefore, learning about the numerous choices is an excellent place to start.

Some popular alternatives to individual deals are:

  • Angel groups and syndicates
  • Gaining funds by asking a group of people for donations
  • Angel Investors Clubs
  • Funds, SPACs, and venture firms

We will discuss the benefits and drawbacks of each in-depth, depending on what stage you are in your investment journey.

Syndicates

Another way to enhance your investment strategy is through syndicates.

The term “syndicate” refers to a group of people or organizations that work together to handle significant investments, which may be too big for one person or company to manage alone. Syndicate managers are frequently charged with spreading the risk.

An angel syndicate is a group of angels collaborating to support businesses financially. Each angel would contribute less money than if they invested directly in the firm. This allows angels to invest in more firms and achieve greater diversification by limiting each member’s investment to a smaller amount than if they invested directly. 

Syndicates are particularly helpful when angels are brand-new, as they do not have much money or time to conduct thorough research but want to get started investing. This enables angels to avoid putting all their funds into one company or a few companies.

The primary distinction between syndicates and other angel organizations is that they have a lead investor who will take the lead on selecting which company to invest in. This individual will act as the leader of the investment selection and provide the largest check. 

Syndicates are generally founded by investors that have extensive industry and corporate expertise. They receive better deal flow and deal with more high-paying business deals.

Typically, the lead investor or the person who sets up the syndicate charges a fee, which may be paid upfront and as a percentage of successful investments. 

Syndicates usually attract more angel investors because they have track records and experience and manage to raise more funds for startups than individual investors.

Being part of a syndicate gives individuals better odds of finding successful startups due to the more extensive networks these groups have. With connections to VCs, investors, and entrepreneurs, as well as experience in conducting due diligence, being part of a syndicate improves your chances of choosing a winning startup.

As syndicate groups become more prevalent, the competition among them stiffens. There are always big players in every game, but in this case, there are also bigger players.

AngelList is the most well-known syndicate platform. It is the most popular syndicate center online. Other potential syndicate options are Leva, FundersClub, SyndicateRoom, and The Syndicate.

Some of these groups require a personal connection to join because you can mainly only get in by invite. However, some groups let those interested attend meetings to see what it is like and give input; this allows the members to gauge their dedication and what they could bring to the team. This is extremely beneficial for both parties involved.

Some investing groups might require an annual subscription or membership fees. They also hold periodic events where they invite entrepreneurs who need funding to come and pitch their ideas and businesses. These may be great opportunities to meet people and network, regardless of whether you end up investing through the syndicate.

The Purpose of Investing As a Team

Angel investors are more inclined to invest in a startup or business that has an angel investment group behind it. It also improves the position of the investor, knowing he is not alone in putting his money into a certain firm or project. Angel investors form teams for a variety of reasons, including:

  • To lower the risk level when investing in startups
  • Joining a group aids in the conduct of more thorough due diligence.
  • Our team can control the number of deals that come in.
  • Teams will have greater portfolio diversification potential because the combined networks will be larger than each individual network.
  • To have more control over the outcomes of their investments

Angel Investor Syndicates and Where to Look for Them

Investor syndicates are available almost everywhere, depending on your sector and location (although many operate online as well). Some are more open and all-encompassing, while others specialize in particular sectors. Syndicate investors have funded over 60,000 startups and entrepreneurs in the United States.

There are a variety of ways to locate angel investor organizations, depending on your search criteria, network, or relationship:

Channels to Find Angel Investor Syndicates

Internet

The internet is a great place to start if you are looking for angel investor groups. You can use online tools like AngelList and Crunchbase to find groups that match your criteria. LinkedIn and Pitchbook are also great resources for finding potential investors.

Organizations That Invest in Start-Up Companies

The United States Angel Capital Association maintains an extensive online directory of angel investment organizations. It is the same in other countries; all you have to do is figure out how to locate whatever you are searching for based on your investment concept, hobbies, or passions.

Networking

As previously stated, networking is the most effective technique to discover startups, other investors, and angel investor syndicates. When researching syndicate angel investors, being a member of an industry association may be quite beneficial.

Other Members’ Introductions

Some syndicates have one requirement for adding new members: they can only join if invited.

This is an example of a closed membership where a new person cannot join the group unless one or more existing members invite them.

Pitching Events

Another wonderful approach to locating and meeting with angel syndicate managers is participating in pitching events where entrepreneurs and startups meet with investor groups to discuss their ideas and businesses.

If you are an investor considering joining a syndicate, pitching events are excellent opportunities to express your interest to other like-minded investors.

Some pitching events currently take place online, saving time traveling would otherwise take up. This also allows you to meet the founders and other interested investors. Talking regularly with the people you meet will make it much easier in the long run.

The Advantages of Syndicates to Startups

The first thing many companies do may be approach syndicates rather than trying to fill funding rounds with individual angels straight away. So, how can startups and entrepreneurs benefit from syndicates, or why would they choose them instead of individual angel investors or groups?

Advantages of Syndicates to Startups

The benefits startups may anticipate from working with syndicates rather than individual angel investors are listed below.

Increased Size and Efficiency of Funding

Startups may benefit from the new legislation by having a quicker, more efficient method of obtaining funding for their businesses or projects. As a result, early-stage companies will be able to get greater financing than individual investors. Because startups will not be restricted by fear or the availability of money, their advantage is significant.

By forming a syndicate, funds can be distributed quickly and efficiently among investors. For example, the startup will set deadlines for when investors need to wire the money and take care of any due diligence that needs to be completed. By having only one entity (the syndicate) deal with the startup, this process is cut down significantly from trying to manage multiple individual investors.

Table for Market Capitalization

In other words, unless you are a well-known angel, startups are not interested in having dozens of shareholders for small amounts because it is paperwork-heavy and comes with potential risks down the road. Syndicates solve this issue by grouping all shareholders under one name, so there is only one point of contact for administrative and voting issues.

More Resources

Startups also benefit from the large resources available in a syndicate, such as industry knowledge, skills, connections, and expertise. These assets include industry knowledge, skills, contacts, and expertise, among other things. Individual investors may put limits on startups’ access to these resources.

Startups that engage in syndicates have access to a larger pool of resources. This includes mentorship from the lead investor and various support and expertise from various backers. Although there is usually one point of contact, this does not prevent other angels from getting involved with the startup and offering assistance if they have invested as part of a syndicate.

Startups Can Maintain Their Focus

The fundraising process is simplified for company owners and startups dealing with syndicates. The lead syndicate is primarily responsible for all of the paperwork and fundraising activities. Business owners will not have to handle many investors; instead, They will just know who to contact to raise funds.

When dealing with only the lead investor, you can move things forward considerably faster than if you had to deal with other angel investors.

How a Syndicate Works

Just as investments come in all shapes and sizes, so do the syndicates that finance them. Additionally, the level of engagement expected from each party can differ depending on a startup’s size or complexity.

There are no formal rules or conditions governing a syndicate of angels, though there is an informal gentleman’s agreement in place to guide the group’s actions. Furthermore, payments will most likely be made through investment vehicles or funds arranged at low costs to create legally binding agreements.

Here is how it theoretically works:

Process of How a Syndicate Works

The Opening Phase

After a series of pitches and being approached by startups or founders, the lead syndicate selects a startup they believe has excellent upside potential.

After performing due diligence, the lead investor extends the opportunity to the group and provides relevant data linked to the transaction. The lead investor will likely have decided and committed a certain sum of money. To complete the arrangement, the lead investor will provide various information, including the amount involved, valuation, company structure, the timing of the operation, deadlines, basic terms of the offer, fees involved, etc.

Deal of Investment

Finding more details about the startup and its founders is easy for anyone interested in the startup or operating within the same industry.

As an interested investor, you may request more information about the offer. The lead investors will provide all information required to assess the investment opportunity and interact with the founders. Business design, milestones completed, industry size, staff count, financial statistics, and term sheet are examples of this data regarding the company.

Investors will then indicate the amount they are prepared to invest. In some cases, the lead investor recommends the syndicate’s investment amount.

Following that, you must promise to invest by signing various documents, including an investment agreement, terms, and conditions. All of these will be handled by the lead syndicate on behalf of the group.

There are three primary documents that potential investors will want to review before committing: the Limited Partnership Agreement (LPA), which outlines the investing company’s parameters; the Subscription Agreement, explaining the terms of your share purchase; and lastly, a Private Placement Memorandum or PPM. This legal document includes a summary of the offering risks as well as details on how raised funds will be spent and what kind of securities are being offered.

Getting the Contract Signed

An investment vehicle is created to aid in the transaction process. It will be in charge of handling all of the bottlenecks that might occur during the deal.

Depending on the contract, the investment vehicle’s costs would be shared or paid for by the agreed party, regardless of whether or not the syndicate has financial backing.

Finally, once the investment vehicle has completed its job of covering all angles by transferring the funds to the startup, lead investors ensure that the money is transferred. In certain situations, an escrow is used to keep track of the investment vehicle’s management of the funds.

Monitoring

Once we enter this next phase, the lead syndicate will be in charge of following up with the investment, talking to the startups, and keeping everyone in the loop with regard to how well the startup is doing.

Investment Termination

Nobody wants their investments to go sour, but it happens occasionally. If things are not going well, the lead syndicate and the startup can agree to terminate the deal. This could be because of a total or partial acquisition of the startup.

If the investment succeeds, the syndicate recoups its original investment plus any dividends and capital gains. The lead syndicate also receives a portion of profits above the initial investments and specified target return (hurdle rate), usually around 20%. Hurdle rates are typically set at 6% per year.

For example, assume an investor puts $10,000 into the syndicate of Startup X with a 20% carry rate and a 6% hurdle rate each year. If Startup X is liquidated after two years, the value will be twice what it was when it was invested, so investors will get their initial investment of $10,000 plus interest ($1200 in this case). Individual investors will receive $7040 out of the remaining $8800 earned through the company’s liquidation (assuming no other fees).

The Cost and Structure of the Syndicate

Syndicates are a lot more approachable to startups, founders, and investors now. Assume you are an angel investor looking to invest in several deals with other angels. You may create a syndicate and set the group’s operating structure in that case.

Forming and participating in a syndicate has been made simpler by platforms like AngelList. You can join an existing group or start your own if you prefer. Other platforms only allow accredited investors to back projects.

It is easy to join the AngelList investing community. However, a fee is collected for each investor after they invest in a fund on AngelList. These costs depend on each Fund or Syndicate and are explained during the closing process. Assume that an investment generates a profit. In this case, a share of the profit or carry would be kept by the fund lead or investment adviser, as previously said.

Although you usually do not have to pay to join a syndicate, some costs come with setting up, managing, and administering deals when members invest.

Special Purpose Vehicle (SPV)

Every deal necessitates the creation of a Special Purpose Vehicle (SPV). Early-stage investors may use SPVs to raise cash for later-stage pro-rata shares and unique prospects.

A typical syndicate organization is shown below.

A syndicate of investors is putting $184,000 into a startup called Zeba Inc. Carry is 20% with no hurdle rate, and the setup fee is $16,000. With this in mind, the syndicate plans to raise $200,000 to invest $184,000 in Panther Inc. (after subtracting the setup fee).

Each group member contributes $20,000 to the project and pays a 10% share of the setup fee. This means that out of the $20,000 contributed by each member, $1,600 is set aside for setup fees, while $18,400 is paid to Panther Inc.

Panther Inc. was bought out a few years later by another company, and the syndicates received a $1,000,000 payout.

At this point, each investor will get back their $20,000 investment (10% of the original $200,000). 20% ($160,000) will be set aside as carrying, and the remainder of $800,000 will be disbursed to the ten investors.

The final position for each of the ten investors will be as follows: $20,000 initial investment, 10% of $640,000 equals $80,400 (the share of the amount left after deducting carry), and total payout to each investor is $84,000.

Note that carry was not mentioned or brought up until the deal became profitable.

Conventional Fund

Most investors are charged a management fee and have to pay the lead of the fund, typically around 20%. This type of fee arrangement is called a “conventional fund.” In this arrangement, the investor is charged management and performance fees. The management fee itself is usually only 2%. The performance fee is often 20% of the profits. The arrangement is called 2 and 20. 2% for the management and 20% of the profits.

Lead Investing in Investment Syndicates

Angels with extensive expertise evaluating investment possibilities and making investments in a wide range of businesses and deal flow that many investors lack access to are known as top-tier syndicates. Their networks are generally robust, and most transactions come from them. They are likelier to be angels or productive startup founders with experience in many sectors over time and an understanding of the intricacies.

What Does a Syndicate Lead Do?

A syndicate lead is a crucial component of every angel syndicate, allowing the organization to communicate and act as a unit. Their responsibilities might include the following:

Responsibilities of a Syndicate Lead

  • Organizing the syndicate’s operations. This involves conducting due diligence, as well as leading negotiations and contracts.
  • If necessary, they find more angels.
  • The leader is in charge of keeping track of the syndicate’s investment. This includes taking on the role of a connector between the syndicate, investors, and start-ups.
  • The lead syndicate usually has the most experience and time to operate with the investor. He will have built strong relationships with startups or founders before any deals are completed.
  • Having a lead investor on board helps to build the investors’ confidence, allowing them to handle more projects. The lead usually has the knowledge and abilities to vet prospective business arrangements thoroughly.

Startups are more likely to succeed if they work with a lead syndicate than with single investors. This is because groups have more experience and are willing to create an efficient communication channel.

The Qualities That Make a Lead Syndicate

If you want to be a successful syndicate leader, then you need to have certain qualities, which are listed below.

Qualities of a Lead Syndicate

  • Good track record: This entails angels with a solid track record investing in firms and continuing to invest and exit. Or founders who have the money to invest in companies.
  • Access to money: Companies in the group will be required to seek funding from lead investors. Put your money where your mouth is.
  • Good deal flow: A lead needs access to regular exclusive deals for the group to invest.
  • A solid business mind: A competent lead syndicate must have sound judgment, and it stems from a deep understanding of the market and experience in making sound judgments.

A lead investor may have all of those qualities but may still miss out on a lucrative agreement. Any investing poses its degree of risk. Syndicate financing, on the other hand, can assist minimize this danger by lowering your investments while increasing diversification and supporting following a trusted and experienced investor.

Crowdfunding

Crowdfunding is when a group raises money for a project or business instead of relying on venture capital or a few individuals. This can be relevant to people who are interested in early-stage investments.

What Are the Different Types of Crowdfunding?

There are four types of crowdfunding, each with its own unique features. However, the similarity between all four types is that they receive money from public members through internet platforms such as Kickstarter or Indiegogo.

Types of Crowdfunding

Raising equity, debt, donations, and rewards are all possible with crowdfunding.

Let us look at each one in detail and several real-world situations.

Donations

The donation method of crowdfunding occurs when individuals give to a campaign, a company, a cause, or an individual, not expecting anything in return. This form of crowdfunding might be compared to making a charitable contribution.

Assume you are launching a crowdfunding campaign to raise money for your firm to purchase a particular type of machine to speed up production. The individuals who gave you funding to acquire this equipment are encouraging you to continue growing your business and nothing else. They would not get their cash back or receive any kind of interest.

Although it is mainly known for charitable causes, GoFundMe can also be used by businesses to solicit donations. This might be the perfect solution for you if you have a nonprofit organization or service-based business.

Other donation-based crowdfunding platforms include DonorsChoose and Causes.

Debt

In debt-based crowdfunding, also called peer-to-peer (P2P) financing, backers pledge money as a loan that must be repaid with interest by a particular deadline. Businesses use this type of campaign to raise funds from the public for a specific time period where the percentage interest and date of repayment are specified in advance.

Prosper, LendingClub, FundingCircle, and P2BInvestor are just a few of the debt-based crowdfunding sites.

LendingClub is a debt-based crowdfunding site and P2P lending platform that provides up to $40,000 in private loans and around $500,000 for small businesses. Loan durations are three or five years.

To be eligible, your organization must have been running for at least one year, and the applicant should possess 20% ownership of the firm. Additionally, it needs to earn $50,000 yearly revenue-wise.

Reward

On the other hand, a reward-based crowdfunding campaign gives investors something in return for their money. These rewards may be offered through services, items, discounts, branded products, and more.

If you want to start a business, Kickstarter is the perfect crowdfunding platform. With over $5 billion raised for 182,000 projects since 2009, there’s no better place to turn to when seeking financial support. Plus, setting up your campaign on Kickstarter is super simple – you need to specify your funding goal and time frame before sharing it with others. 

Some other reward-based crowdfunding platforms you might be familiar with are Indiegogo and RocketHub.

Equity

Equity-based crowdfunding allows small companies and startups to give away a part of their company in exchange for financing. Contributors invest money into the company in return for receiving shares based on their investment size–an ownership stake in the company.

CircleUp, Fundable, Crowdcube, and MicroVentures are some of the most popular equity crowdfunding platforms.

Equity crowdfunding is available to accredit and non-accredited investors in the United States.

Before President Obama signed the JOBS Act in April 2012, non-accredited investors could not legally invest in equity crowdfunding. However, following the signing of this act, anyone can participate in equity crowdfunding.

The Difficulties of Crowdfunding

Many believe crowdfunding is a simple or cost-free method to raise money. Still, creating a project that supporters will identify as valuable requires tremendous effort. Although success is not predetermined, backers have gotten savvier about the projects they back since crowdfunding has grown in popularity.

Companies use crowdfunding to raise funds for different reasons, but active and engaged communities of fans generally back the most successful campaigns.

Several challenges come with crowdfunding, such as developing a marketing campaign to gain widespread support, having dependable founders, and, most importantly, offering a great product.

These are the significant challenges of crowdfunding:

  • Before, during, and after a crowdfunding campaign, figure out how to effectively advertise at a low cost.
  • Creating a description that contains the correct tone and generates interest in the product or service
  • Creating an instructive and interesting campaign video that highlights the solution and advantages. The most difficult aspect is that producing a high-impact film is both time-consuming and expensive.
  • Creating and strategizing the rewards program to generate optimum ROI
  • Determine the most appropriate and cost-effective fulfillment method for your rewards.
  • When it comes to crowdfunding, the most apparent issues to consider are these. There may be additional obstacles that are specific to your product or service.

With equity-based crowdfunding, care must be taken to both educate newcomers – who may have no investment experience – and keep the more experienced investors engaged.

Many people are already familiar with crowdfunding because it is similar to buying and selling online. If someone wants to pre-order a product, they may have to wait a few months before it is ready. However, angel investors and those new to crowdfunding will likely need more convincing before they invest their money.

Crowdfunding is typically not a profitable option when it comes to investing in new firms. Many crowdfunded projects head to the public when a company lacks other alternatives for raising money. Some successful businesses, on the other hand, have used crowdfunding as a marketing strategy to attract more individuals into their fold. Monzo, a challenger bank based in the United Kingdom, has done well in its fundraising effort; it has raised over 20 million dollars (USD).

The AngelList Syndicate System

Angellist is a US-based online community for angel investors, businesses, and job seekers looking to collaborate with startups. Naval Ravikant and Babak Nivi started the site in 2010, intending to assist companies needing talent and money. The website initially targeted technology firms searching for cash. However, in 2015, it began allowing other firms to seek investment from angel investors for free.

AngelList has become the go-to platform for startups and investors, with billions of dollars in assets under management, 47 Unicorns, and more than 3,500 managed funds.

AngelList Special Purpose Vehicles

AngelList is a cloud-based service that allows private equity firms, family offices, angel groups, and individuals to manage special purpose vehicles (SPV) for making single investments. Additionally, AngelList guarantees the privacy and confidentiality of all SPVs and participating investors at all times.

Angel.co is a social network exclusively for angel investors and their companies, allowing investors to form their own syndicate using their technology while also gaining access to the Angel.co audience.

Over a year, over 1500 bargains struck through more than a hundred syndicates. Some syndicates specialize in particular investment phases, such as early, seed, and growth, as well as revenue generation (prelaunch, pre-revenue, post-revenue). You can also choose an industry or special interest like Blockchain or Female entrepreneurs. The number of deals done by each Syndicate is evaluated; then, you may follow them to see how they do.

When vetting a deal, you can assess the following: the pitch deck, minimum investment amount, round type, SAFE amount being raised, pre-money capitalization, syndicate allocation and setup costs, and carry.

How to Invest in Early-Stage Venture Capital Firms

You can invest in multiple startups by purchasing a fund or investment vehicle. A fund is an investment product where the money of several investors is pooled together and used to buy specific assets that correspond to the fund’s investment goals.

Many venture capital firms issue funds, which can be an excellent opportunity for anyone starting out as an angel investor. These vehicles and funds provide exposure to the investment decisions of experienced investors, which can be helpful for those just getting started. For more experienced angels, investing in a fund can also be a way to gain exposure to different industries, areas, geographies, or investment themes that they may not be familiar with but would like to explore.

After you have decided to invest in a specific area using a fund (or similar investment vehicle), it can be tough to determine which venture capital firm’s fund you should use because there are many different options with various purposes.

There are two key players in a venture capital fund: general partners (GP) and limited partners (LP). The GPs are in command of the fund, making investment decisions, selecting firms, and working with them to help them develop. LPs are people, institutions, and organizations providing cash for those investments. It is a big decision to become a limited partner or LP, so several factors must be considered.

Some funds are only open for a short time or until the money goal is achieved; others are by invitation only. Do not hesitate to act fast if you see a fund you are interested in.

Let us look at the overall principles you should follow when selecting a fund to invest in. We have divided it down into a general due diligence checklist, which might be used as a quick reference tool.

What Is Your Plan of Action?

Consider what you want to get out of the fund. What market, sector, geography, or investment stage do you want access to? How long will you invest in this market? What do you anticipate as a return on your investment?

Before you figure out how much money you have to invest, it is important that you first decide what investment strategy you are going to use. That way, you can more easily choose the specific fund or fund manager that fits that strategy–and your investment plan. Go with a professional fund crew instead of just investing in individual startups yourself. They will do the due diligence and startup selection, so it might be a good idea to step outside of your comfort zone and explore unknown areas that could have high rewards.

There are many factors to consider when choosing a fund or venture capitalist, but one of the most important is the General Partners (GPs). These people will be making investments and determining which companies will receive funding. Some things you may want to look for in a GP include investment track record, previous funds, successful exits, failed investments, location, and board of directors and advisors.

Most of these are self-evident, but we want to emphasize that, in our opinion, past investments made by the GPs may have come from either previous or private investments. Finding up-to-date information about prior investments is not always simple, but you will always see how the GPs promote good (and sometimes poor) investments. Crunchbase and PitchBook are tools that may be used to verify some of the information; however, there is not much information available. In any case, when researching GPs, references will always be helpful.

As we mentioned, another area of importance is location. With the outbreak of COVID-19, it has become more evident than ever that locality matters. This becomes increasingly important when assessing investment opportunities in areas where local expertise is required (i.e., emerging markets). In these situations, we would only consider working with GPs who have a physical presence in the areas they are investing in.

Thesis Statement for Investors

There are numerous factors to consider when determining whether or not to invest in a company. These include the location, market, sector, and stage of development of the company, as well as its unique selling points (if any), number of investments, and exit strategy.

The investment thesis of a fund is critical, according to Francisco Coronel. As an angel investor, you should have an investment thesis as well. Still, whenever you want to branch out of your comfort zone, the first step is determining whether this is the market, sector, region, and investing stage you wish to be exposed to. This will be the one place where you can determine if this is the market, sector, geography, and investment stage you want exposure to.

Usually, as an angel investor, you deploy your capital toward companies in the pre-seed or seed stages. But do not forget that older and more established companies are good prospects for investment, too.

Factors like the secret sauce become even more essential for certain investors and GPs. Fabrice Grinda, for example, is, without a doubt, the ideal angel for investing in marketplaces. His experience and understanding of the industry make him an excellent option when examining marketplaces.

The reason behind diversification is vital, whether it is in your portfolio management or startup investing. At a fund level, you should ensure that they are deploying the funds securely and in a way that they will be returned to you. You can also choose to invest in more than one fund as another safety net, but be strategic about which ones those are.

Finally, bear in mind the fund’s exit strategy. An exit plan is a scheme devised by a fund or investor to liquidate their position when specific criteria are met. It is just an investor’s method to get out of a fund.

It is critical to examine a fund’s exit strategy. Not all would be the same because some will appear to sell their assets at a specific round to provide a defined risk.

Some VC firms may seek to exit their investments after several rounds to minimize risk. For example, a fund that focuses on early-stage or pre-seed investing may have a policy of exiting when the startups it backs raise Series A or B funding. This strategy allows the firm to reinvest in other companies while limiting its risks. Other funds may have discretion over when they exit or hold onto their investments until an IPO or some other type of liquidity event occurs.

Other Considerations

Although we have listed the main things you should take into account, there are other matters worthy of consideration, such as the possibility to co-invest in fund companies; whether you can contribute or add value to target companies; size, term, and jurisdiction of funds; company reports and media attention surrounding the fund; responsiveness and flexibility of administration team; how effective governance is within the specified fund parameters and who else makes up the LP pool.

As an angel investor, you should consider a few other things. For example, we prefer those types of funds where the GPs graciously welcome and encourage the LPs to co-invest with them.

If you find the companies where the fund has invested interesting, or if you know something about the market/sector/geography, it might be a good idea to invest along with the fund and get involved with providing advice to become part of them. Many funds do not have co-investment fees (see below), so this is an extra perk.

Remember to consider how quickly you could get your money back and the return on investment. Different investments have different objectives, so choose wisely based on what you are looking for. Some angel investors or startup funds may not provide liquid options for many years down the road, so keep that in mind as well.

The location where a fund is also established matters, as you should investigate the tax and legal outcome of investing in a specific area. Most funds are now created in friendly locations; however, it is always best to be choosey.

You want a reliable fund administrator who will provide you with prompt responses to your questions and periodic reviews of the startup’s progress.

Prices

Funds typically have three associated costs: upfront, ongoing, and carry. Although these fees are normally standardized, there can be significant variations that you should take care to watch out for. For example, a typical fund will incur yearly management fees of 1.5%-2.5% of the assets’ value; in addition, there may also be placement fees charged.

Carry is the percentage rate (PLO) a fund charges for borrowing money. Carry in finance refers to a share of the profits from an investment paid to the GP in excess of the amount the investor contributes to the partnership.

Liquidity

Unlike more popular options such as ETFs or Mutual Funds, VC or startup funds have very little liquidity. While you may be able to sell your portion back to the company (given that the GPs and administrators allow it), keep in mind that this usually only happens when the fund makes sales or exits.

Consequently, remember these two key points: (i) Your money will likely be tied up for several years, and (ii) Because of this reality, it is important to understand a fund’s strategy regarding exits before investing any money.

Taxes

The government will take taxes out when you make money from your investment. However, some funds offer tax breaks. For example, SEIS and EIS in the United Kingdom. It would help if you also thought about whether you are investing alone or with a group.

Investigation

If you follow these guidelines, you should be able to choose the right investment fund confidently. Of course, always do your own investigation and research on each option and talk to people who have invested in them before making a final decision.

However, bear in mind that the most essential aspects to consider are how your investment fits into your overall plan. Bearing in mind the high risks of entrepreneurship, diversification should be a priority in all strategies because one excellent investment might offset everything else lost. Instead of focusing on picking a handful of firms to invest in, this is what most funds try to achieve.

Clubs or Angel Groups

Angel clubs or groups are where angel investors with common interests come together to discuss potential opportunities in the startup world and often invest as a group. They share ideas, deals, and due diligence within their networks and agree to invest or not after hearing each other out. These discussions help test different problems startups might be pitching as solutions by allowing experienced angels in specific industries or markets to offer feedback.

All groups have different procedures, regulations, and methods of attacking deals. Still, the fundamental idea is this: bring viable business opportunities to the table for discussion and decide as a group whether or not to invest in them. This should be an environment that values teamwork and transparency where every member feels comfortable expressing their opinion and bringing new deals to the table–regardless of initial reaction or gut feeling.

Groups typically focus on a certain area or region, but in some cases, cities. However, owing to the invention of internet meeting software, today’s clubs or groups span worldwide and are independent of location.

Groups may also be formed for a certain industry or market or for a specific target market where the members have knowledge and connections.

Organizations and clubs aim to utilize their individual members’ expertise, connections, networks, and resources to discover and support excellent businesses.

Angels are most likely to invest at the pre-seed and seed stages, but this does not imply that either the club, group, or individual angels will not continue investing in Series A and beyond.

Angel groups exist worldwide, with more than 200 in the United States.

However, groups and clubs are not without their flaws. For example, they can often lead to a long discussion and evaluation periods, due diligence, plenty of repeated questions to the founders, discussion over investment terms, and small check sizes. As a result, startups may be reluctant to accept or raise through angel groups.

Syndicates typically have a lead, so discussion is minimal–angels either invest in the agreed terms or walk away. However, because groups share money and lack a lead figure, decisions may be delayed. Additionally, some angels might not get adequate exposure to startups in this environment and feel shy about speaking up or using their networks to find more information or help new businesses.

Investing in startups is risky, but if you have the stomach for it and believe in the company you are investing in, it can be very rewarding. We recommend that you look into angel investor groups and see if contributing to or being part of one is something you would enjoy.

Groups of Angel Investors That Work Together

There are hundreds of Angel organizations worldwide and several in your region. The Angel Capital Association has a comprehensive list of accredited and affiliate angel groups and platforms in the United States and Canada.

Beauhurst used the table below to order 23 active angel groups in the United Kingdom. This ranking is mainly based on closed equity deals between January 2011 and September 2020. These were officially announced, while others were made public knowledge to the author.

Although this ranking is based on registered deals announced to the public, it should only be taken as an indicator. Many investors do not announce their deals to the public.

Final Thoughts

Angel investors are a vital part of the startup ecosystem, providing much-needed capital for businesses in their early stages. However, they are also very risky investments and should not be taken lightly.

Building your portfolio as an angel means that you should keep in mind to not put all your eggs in one basket. You should always diversify your portfolio to reduce risk. Secondly, don’t forget to do your due diligence on any potential investments. This includes researching the team, the market, the opportunity, and the product.

Because it can be difficult to know how to find or evaluate good investment opportunities, one way to get started with angel investing is by co-investing with other investors. This way, you can learn from others and start building your portfolio and reputation. You don’t necessarily need to come from a single deal in order to start co-investing.

Finally, don’t forget to have fun! Angel investing can be a very rewarding experience, both financially and emotionally. So go out there and find some great startups to invest in.

FAQs

An angel investor is a high-net-worth individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. Angel investors are often the first source of funding for young companies and can provide invaluable mentorship and support.
You don't need to have any specific qualifications to be an angel investor. However, most investors are usually successful entrepreneurs, executives or professionals with a lot of experience in their field. You will also need to have some spare cash that you are willing to invest in high-risk startups.
The biggest risk of being an angel investor is that you could lose all the money you invest. Startups are a very risky investment, and many fail within the first few years. Even if the startup is successful, there's no guarantee that you will make any money back on your investment.
There is no set amount of money that you should or shouldn't invest. It all depends on your own personal finances and how much risk you are willing to take. Remember that you could lose all the money you invest, so only invest what you can afford to lose.
Angel investors need to be aware of a few key things before investing in a startup company. They need to understand the business model and how it will make money. They need to vet the team to ensure they have the experience and skills necessary to execute on the plan. And they need to assess the market opportunity to make sure there is enough demand for the product or service.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.