This protocol is meant for those just starting to angel invest in their mid to late 20s, with net worth around $500K.
TL;DR
- Invest 5-10% of net worth (ie $500K -> $25-50K invested), spread between several investments.
- Aim for valuations <$20M.
- Maximize deal flow by capitalizing on personal networks.
- Find compelling reasons why the idea and founders will succeed as well as some unique edge you can contribute.
Sourcing
Rather than making a couple of larger bets, it’s better to make several smaller bets since the expected value stays the same while variance decreases, allowing us to achieve a desirable outcome with higher probability. However, given we don’t have much capital, increasing the number of investments comes at the expense of check size. Given that most founders have a minimum check size of $5-10K, smaller investments have to come from a personal relationship or disproportionate leverage. Tap the following networks to source deals:
- Friends & personal network
- Current angel investments
- Funds & accelerators you have a connection to
- Co-investors
Gaining conviction
VCs and accelerators can afford to take shots in the dark. The risk, which is split across tens if not hundreds of bets, is passed through to LPs, who are diversified across multiple funds and asset classes. For them, not everything has to line up; maybe the founding team is impressive or the idea is compelling, or the investor is uniquely situated to help the company succeed.
In contrast, we don’t have the capital to make hundreds of bets, so we must have high conviction in each of the bets we do make. Find convincing responses to the following questions or pass on the opportunity:
- What problem is being solved? How much are people willing to pay to solve it?
- What is the unique edge? Why hasn’t this idea been done yet?
- Why is this the team that will make this idea successful over any other founding team?
Leverage
Having an outsized impact as an angel investor will help secure additional opportunities by unlocking follow-on investments and increasing deal flow as founders introduce you to their friends. Even co-investors will go out of their way to include you in their deals if they believe you may increase the expected value of their investment. As such, it’s important to consistently think about what you bring to the table as an investor:
- Capital: irrelevant until check size is $10K+
- Connections: strategic introductions and recruiting
- Advice: could be fundraising, emotional, industry-specific, etc.
Investment
Depending on the extent of your value add, you can explore additional vectors of the investment including allocation amount, MFN status, anti-dilution rights (pro rata or ratchet), or if your involvement is pivotal to the startup’s success, perhaps an advisory role and corresponding amount of equity. Of these, it’s most important to protect your investment against dilution.