Angels and Angel Groups: Adapt (or Get Out)

Mar 31, 2014 • Paul Singh

If they want to make money in this asset class, anyway. I spoke at the ACA Summit in DC last week and, perhaps unsurprisingly, found that the vast majority of the investors in attendance were being told the same stuff we’ve been hearing for years: focus on terms, look for deep intellectual property and be deeply involved in the companies. It’s a shame, because it suggests that the majority of financial returns come from the investors themselves.Capital, deal flow and an investor’s judgement are all table stakes – they’re important to have but aren’t enough to build a portfolio that will produce returns. Access into the best deals is what should be on an investor’s mind because financial returns come from the founders and their teams.

Some suggestions:

  • Angels should consider a “fast follower” strategy. Filter for companies on AngelList that have recently confirmed an investment from an early stage VC and work hard to get to know those teams ASAP. (Pro tip: consider building a LP-like portfolio via the Syndicates that are available.)
  • Angel groups should consider an “independent consensus” approach. Have your selection committee meet the founders and hear the pitches separately. Immediately after the session, write down a yes/no decision and include 1-2 sentences explaining the choice. Once everyone on the committee has done this, everyone shares their decision slips. If it’s a unanimous “yes” or “no” decision, no additional debate is needed. If it’s in between, your debate should be around the sentences on the decision slips which, hopefully, aren’t influenced by internal group politics or groupthink.
  • Both types of investors should build a portfolio that includes some deals in other cities.Counterintuitively, there’s a growing body of research that suggests that investing in companies 100+ miles from you may be a safer bet than investing only in local companies. (The early research suggests that investing in companies outside your immediate geography might raise the bar for traction and trust. Companies that make it past that bar may ultimately be better investments anyway.)

Whatever you do, it’s best to avoid doing the same thing as your local peers because they’re all probably losing money anyway. Big financial returns are increasingly happening despite the investors involved, not because of them. Internalize this, it’ll change the way you think about making money in this asset class.