How to Minimise the Prospect of Lousy Angel Returns!
One of the most compelling presentations at this year’s Asian Business Angels Forum, (ABAF), was delivered by Swiss-based angel investor, Brigitte Baumann.
Brigitte spoke about how important it is for angel investors to have an investment strategy.
As she put it, “if you want to have fun as an angel investor, and minimize the prospect of lousy results, define an investment strategy”.
She went on to explain that this doesn’t need to be especially sophisticated or clever. An investment strategy provides a framework to help you decide what to invest in next.
Your strategy should include the following six elements:
Weigh each investment opportunity up against the two types of risk:
- The business – is it a good technology or product?
- The investment – does the deal have good terms and structure?
Understanding your motivation for being an angel investor includes considering what your drivers are. Is it to make money, make a difference, create jobs for your local economy, have an impact on the next generation, on the planet? Make a note of these and accord them the appropriate priority for you.
What are your personal objectives for being an angel investor? This will determine how you engage with your investment and the founder.
Do you want to transfer know how, do you want to learn how to get good at “doing deals”, do you want to make 20% a year IRR.
With respect to the latter it’s important to have a return target. To be clear this is not about multiples on your money invested. These are not relevant when it comes to doing well financially from angel investment.
When to stop
You should also have thought about why you would not invest or stop investing; both overall and on a specific deal.
When will you visit tough love on any ventures you’ve put money into?
A decision to make a “quit” call may simply be because the timing is wrong for a particular venture or it may be that the team is not executing effectively (or at all!)
How much time and money?
Think about the time and money you have to invest.
Available time is critical and will determine how many ventures you will be actively engaged with.
Think about how much money you have to invest; in total, per year, per investment. What is your investment horizon? When will you invest, hold and divest? Whose money are you actually investing? What impact should/does this have on your other investment decisions.
You might also like to have a framework for the types of investment you are going to make. Will your preference be equity and if so, preference shares or ordinary shares? Or will you be happy to invest via convertible notes?
How many rounds will you be in for? How many investors do you want to invest alongside? Do you care about who these people are?
What type of investment will you make in which industry?
Do you have a preference for particular business models or stage of company development? Do you care where the business is located?
Putting it all together
Brigitte recommends spending an hour or so asking yourself these questions making a note of your answers and revisiting them on a regular basis.
Doing so will likely improve your prospects of success. And let’s face it, as angel investors we need to improve the odds of success in every way we can!
Brigitte, a Business Angel and CEO/Founder of Go Beyond. She serves on the selection committee of the World Economic Forum’s Tech Pioneers and is a Member of the Präsidium of KTI, the Swiss commission for Innovation and Entrepreneurship. She is President of the Board of EBAN & Chairs Young Presidents Organization’s global Angel Investing interest group.
Brigitte holds a BS in Chemical Engineering from Tufts University and an MBA in Finance from the Wharton School at the University of Pennsylvania.