Angel Investing: What do startups and investors alike need to know?
Having spent almost three years working in the startup scene in New York connecting international startups to investors, I wanted to learn more about the investment environment in Ireland. Yesterday, I attended the annual HBAN (Halo Business Angel Network) conference at the Royal Hospital in Kilmainham. The impressive panel of diverse speakers drew a large crowd – a mix of ‘old school suits’ and the next generation of angel investors; some who have successfully exited and are back to invest or raise again for a new venture such as Mark Little (Storyful). Here are some of the insights that stood out to me:
A Portfolio Approach
There’s a lot of glamour to early stage investing. We’ve all heard the success stories and missed deals – such as Nolan Bushnell, founder of Atari who once turned down Steve Jobs who was offering a third of Apple for a $50k investment. However, if you’re serious about making a return, you must commit and a portfolio approach is essential. According to Peter Cowley, UK angel of the year 2014/15, you need a minimum of 10 diversified deals to have a chance of a positive return. For some context, HBAN syndicates typically invest €250k per deal with individual members committing €25K-€50K per deal. To ensure a positive return on your portfolio, 40+ deals are needed. The resounding sentiment among speakers was: if you go it alone, you will fail. In light of this, HBAN national director John Phelan mentioned the trend of investors participating in more deals for lower amounts to spread risk.
Importance of Syndicates
Choosing a portfolio approach means a lot more admin work for the investor. At the same time, to give a startup the best chance of success, someone needs to take a board seat. The solution is to invest in a syndicate with people you trust. People who you respect and where you know their investment style. The Angel with the most relevant domain experience should lead the deal, take the board seat and manage the responsibility. “If there’s no deal lead, then either it’s you or walk away.” Syndicates allow you to manage a large portfolio, diversify risk and reduce the work load. HBAN have a number of syndicates all over Ireland and are expanding abroad. Feargall Kenny, founder of New York Digital Irish spoke about the new Digital Irish Angels Syndicate in New York. It consists of 20 angels who have invested in 4 deals so far. Below are the top 10 mistakes Feargall sees Irish companies make when taking on the US market. Read more about these mistakes in this article by Feargall.
Investor Founder Relations
Opening keynote Christopher Mirabile called for proper governance at an early stage. As soon as a deal is on the table, a board should be established. If founders resist, walk away. Unsurprising given the recent revelations in the tech industry. The investor, founder relationship was described as different to friendship or marriage, more akin to ‘Allies’. People you would go to the trenches for. According to Patrick Liddy of Activation Energy who sold to EnerNoc; “As in investor a good test is to ask yourself is this a company I would actually like to work for?” Here are 5 takeaways for entrepreneurs trying to raise money:
- Visualize your future goals and the path to get there. It will help you build resilience when you get kicked in the head.
- Learn something from every no. Raising money is like going to a night club and asking every girl to dance, most times you will fail but make sure you learn why they refused.
- Investors ask questions they know you don’t have the answer to. They’re asking to make sure that you have asked these questions yourself.
- Deal terms actually matter. A ‘down-round’ can destroy founder equity & founder stamina.
- Remember that if your customer acquisition cost (CAC) is more than your Customer Lifetime Value (LTV), you don’t have a business.
For anyone interested in learning more about Angel Investing, Peter Cowley shares his thoughts & resources on his personal website here. Make sure to connect with HBAN team too. At Idea 2 Scale, my new initiative, we're experimenting with new models to connect investors, startups and corporates. If your interested in finding out more, reach out.