Mysty Rusk
Something happens in the process when you collaboratively have the right people and objectives in place as an angel investor. At some point for the people in the room there is a realization that the next generation of business leaders is there right in front of us and that there’s ways to help them succeed. It’s not just about money for most.
One survey finds that while about half of angel investors rate the potential for returns as their top motivator for investing, about a third also rank solving some of the world’s biggest challenges as another.
Experienced angel investors realize the importance of a good network, diversification of their portfolio, quick and thoughtful due diligence, and getting to know the team. Even then, there may be no way to foresee a global crisis, a stealth competitor, or other risks that are completely outside the startup’s control. But some obstacles are avoidable with the right knowledge. I have over 20 years experience, I’ve reviewed about 4,500 deals working closely with others in this industry, and founded one of the largest angel conferences. These are the seven most valuable lessons I’ve learned.
1. Signing an NDA.
I signed a couple of non disclosure agreements early on. As a novice investor, I didn’t see the harm.
What I quickly learned is that most NDAs are sweeping and cover things you wouldn’t expect. They also prevent you from doing good diligence or sharing deals with other investors.
When I get serious about a deal, I often talk with my colleagues and others for input or to better understand some aspect of it. Like most investors, I don’t write huge checks, so I lean on my network to assemble other investors around the deal. An NDA prevents me from doing that. Early in a conversation with a founder I don’t need to know highly confidential information that an NDA protects. If I get far enough into due diligence and it becomes important to the deal to know the more confidential aspects — like software code, methodology, or a unique sales process — I will work with a founder to identify a third party we both agree on to sign an NDA, evaluate confidential components, and report findings to me so I can make a more informed decision.
2. Too many eggs in one basket.
A lot of us make this mistake early on: We invest too much money on one of our first deals. We look at a few deals and decide, for whatever reason, to invest a big chunk of our budget into one deal. If you spread the money around (investing in a member-managed fund for example) you can learn a lot about different industries and stages while you build up your network of other investors.
3. Not paying attention to the ones that sound too ‘out there.’
Yep, an early mistake I made was paying too much attention to the product and not enough to other aspects of the deal. A device that mimics kidney function and miniature nuclear reactors that snap together like Legos both seemed like pie-in-the-sky ideas that I passed on when I first started out.
Home Dialysis Plus (now Outset Medical) and NuScale Power are both unicorns now. They succeeded despite how outlandish they seemed because they targeted problems worth solving, and had solid technology, good business models, effective and experienced management teams, and a strong understanding of their competition and where the market was headed.
4. Going it alone.
I have tried this, but it never works out. I don’t have enough capital, knowledge, or time to invest effectively by myself. Sourcing deals, doing due diligence, and effectively managing an investment after it’s made takes time and more expertise than one might think. The majority of investors have a net worth of less than $5M and are probably not in a position to write $50K–$200K checks. Startups don’t have time to manage large numbers of small-dollar investors, and VCs don’t want to see crazy cap tables loaded with small-volume investors in later rounds. This is where angel groups come in.
On the investment side, networking with other investors helps us share resources and hedge against risk. Especially if you are a new investor, your investor network is one of the most valuable assets. There are funds that are managed by members or managed by professionals that have various leanings, by industry, size, lens, or problem they’re trying to influence. Investors pass deals around. I may see a deal that doesn’t meet my criteria, or I can’t invest in it for some reason. I’ll share it with others that I know are interested in a specific industry, problem, price point or expected timing on a return.
Investors lean on each other. If I see something interesting where I can’t quite understand some of the finer points or potential risks, I’ll call someone in my network for help deciphering the deal. Others call on me in the same way. With our various backgrounds, we have the ability to ask deeper questions and press entrepreneurs.
I’m personally a fan of the angel conference model. An angel conference is usually a small fund, run in conjunction with a contest. Founders apply. Investors work together to narrow the number of applications until they choose a winner at an event that is usually a public affair. The cost is usually low, and investors get immediate access to deals, and develop a network of fellow investors in a short amount of time.
Putting together an assembly using tools like the SPVs (special purpose vehicle) allows angels to invest together quickly. Additionally, an investor can spread post-investment responsibilities around and be more helpful to the founder in focusing on scaling and success.
5. Not getting to yes.
While the first angel group I was a member of would have great networking dinners and regularly hear deals, nothing would happen unless the opportunity was in line with the expertise of an investor who had been in the industry for a long time. That meant we couldn’t fund anything except software- and forestry-related ventures, and the process of evaluating a deal could continue indefinitely. I met great people and had great conversations, but in two years, I never made an investment.
I fell into a rut. It became easier to find a reason to pass on any deal. In some ways it was a great experience — I met interesting people, heard interesting pitches — but it didn’t help me deploy capital and it was a disservice to the startups we entertained. Over time we stopped seeing great deals because we earned a reputation for a “slow no” and “never-ending maybe.”
At some point I realized a person could find a reason to say no to any deal. Every deal has risks that can’t be completely mitigated. The San Diego Angel Conference is where I found the spirit of “get to yes.” “Getting to yes” for us means getting through a deal quickly, giving actionable feedback to the founder if we don’t invest at this moment, and providing resources or connections to help the founder improve. We leave the door open, watch for founders that make progress, and stay in touch so we can invest when the time is right, or help founders get to the right investors.
6. Letting emotion get the best of you.
Whether it’s fear of missing out, falling hard for an entrepreneurial team, or “what ifs,” it’s easy to let emotions creep in. Recently, I overstepped one of my own rules when it comes to emotion and vetting financials as an investor. I met a founder and loved the company, the products, the founder’s personal story, and her passion. I believed there was a huge potential for success.
The founder’s resume included substantial experience in finance, but for some reason, we couldn’t get the appropriate financials from her. I blew it. I was so enamored with what I thought could be, I ended up working with the company’s team to sort out the mess and deployed my own tools for forecasting.
In the end, I spent an inordinate amount of time and the founder rejected my offer, and it compromised my standing with the group I was working with.
Love of an idea or process won’t make it successful. Assess opportunities objectively. Spend time getting clarity on what’s important to you and what you want to get out of an investment. Ask good questions over asking all the questions you can think of, and if an answer makes you uneasy, take the time to figure out why.
7. Betting on the horse, not the jockey.
“Bet on the jockey, not the horse” is a popular statement I’ve heard a lot over the years. The basic sentiment is to make decisions based on the team and not the product. Said another way, a grade-A Team can effectively get a grade-B product to market, whereas on the other hand, a B Team can destroy the potential of an A product. It can be easy to get drawn into the sparkle of an exciting product, or a solution that aims to address a problem close to your heart, but that may not have the business backing to bring it to fruition.
With an uncertain economic environment, it’s all the more important to invest in a management team with experience, preferably working together to overcome obstacles and navigate difficulty. Resiliency, managing adversity, adapting to change are crucial skills for entrepreneurs, the need for which is only magnified in uncertain times. Often important factors are authenticity and grit, the leader’s passion and why they were moved to say, “I’m going to spend every waking moment living and breathing this business, including putting my family, home, savings, and future on the line.”
Angel investing can be a new kind of “barn raising” and community building. It’s about the network, expertise, innovation, and inspiration. It’s not for everybody. It can be risky. It can also be extremely gratifying, helping passionate people solve some of the world’s largest problems in financially rewarding ways, and that is the part that keeps me excited.
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