Angel Investing: What I Look For in Startups

May 23, 2020

I recently staked a rapidly growing tech company from Amsterdam. And whenever I tell my friends that I’m angel investing in startups, I see their eyes light up, and posture improves by widening their shoulders and standing up straight. And naturally, the questions on how and why start flowing.

If you are one of those guys, this blog will satisfy your curiosity and hopefully spark some motivation to get started as well.

But, what is Angel Investing?

An angel investor is usually a private person who invests money in a company in return for shares of the company.

Many poker players I know started investing in startups and companies, once they started winning more than they needed. They are now considered “angels”.

9.5 Important Things to Check When Angel Investing

1. Where to Find Fast-Growing Startups

Now you know, it’s quite a low barrier to start angel investing. And you find yourself wondering “where can I find companies who want investments?”.

Bear in mind, that when I talk about startups I don’t mean public companies that are traded on stock markets.

I’m looking at companies that are privately owned, with less than a hundred employees and younger than 10 years old. Preferably in the technology sector. That gives me a range of companies to look at with growth potential for a high return-on-investment (ROI).

There are a few ways you can go about this. And every person has his own preferences, but here’s a short overview of some ways you can start looking for your hidden unicorn gems.

Look an Entrepreneur in His/Her Eyes

I personally like to shake a founder’s hand, and let him pitch his vision to me face to face. This way I can get a good judgement on his personality, ambition and drive. Which I find important to get a “click” with the company for me as an investor.

Fintech Festival – Blockshow – Singapore

To meet businesses that are looking for external capital I go to network conferences, fundraising or capital days (also known as “Demo Days” in the startup accelerator world), and pitch events. Often there is a ticket you can purchase upfront, or once you get into that world you’ll get invited to attend events without any cost.

I’ve attended several blockchain conferences across Europe and Asia over the past few years and there are always businesses looking for capital there. Not only the ones that are selling their tokens. But I’ve met several companies working on regulations, infrastructure, hardware, or marketing that are selling equity in return for cash.

However, if you’re not a fan of these official events to start your search you can always walk into co-working spaces. The last coworking space I worked from in Rotterdam, 42Workspace, was full of startups looking for investments. In fact, in 2019 the startups in the co-working space raised over €12 million which included investments in HelloPrint, AirdropAlert, and Shypple.

Some big co-working spaces that have several worldwide locations you can walk into are:

  • WeWork
  • Spaces
  • Tribes
  • Impact hub

Scout Online Platforms to Start Angel Investing

Do you rather stay at home to put your money to work?

That makes sense, especially if your background is in poker like me. From a comfort level perspective, this is the better route for sure. Plus, you can research a bigger sample of startups to pick your bets from.

There are a few business platforms where startups register themselves and their business details, like corporation structure, investment status, and product specifications.

And of course, there are businesses that are closing the gap between companies and investors by providing investments through their platforms. These are often referred to as crowdfunding or angel investing platforms.

Business Platforms

Angel Investing & Crowdfunding Platforms

Your network, duh!

Don’t you have friends or family with entrepreneurial ambitions?

What people usually tend to forget, is that they have a personal network to tap into. Even it’s not a direct friend, possibly a second (a friend of a friend) or third connection from your network is a good fit.

My most recent investment came through my business network. Last year, a business relation introduced me to the founder of a startup that is working on Speech artificial intelligence. After meeting face to face, I kept in touch with him and once he was ready for a seed round, I was ready to jump on board.

Now if you really can’t find any angel investment opportunities within your inner circle, you might want to look into growing your network.

Start building a presence online on LinkedIn. As a poker player I’m sure many CEOs of startups would be happy to connect.

I’m starting a curated group to discuss angel investments and strategies. Want to join? Contact me here.

2. Am I a believer?

One of the first things I need to get excited about is the idea and/or vision of the company.

Businesses exist because they are solving a problem. While most of the startups I look at are in the technology space, they are usually solving a future problem.

Venture Forum – Belgrade

Now, do I believe the following:

  • Is this a problem that will arise?
  • Does it need to be solved?
  • Is the solution adequate?

If I get a: ” yes, yes, and yes!” I give myself the green light to start diving deeper.

I’ve looked at dozens of companies, especially in the ICO frenzy, where I couldn’t get a “yes” on the very first question. In that case I fold quickly and move on to the next options.

3. Talent Matters When Angel Investing

Another thing I find important is the founding team. Do they have the skills, drive, ambition, and team to build and execute the right strategies to reach their goals?

No matter how good you plan ahead, while running a company many things will go wrong. So the ability of a team to identify problems or leaks, and the capability to solve them quickly is very important.

A common team compensition is the Hacker, Hustler, Hipster. Each one of them has a different focus within the company, but all of them are important for succes.

The Hacker

Is the developer, responsible for the software architecture, security, server set up and ofcourse coding the actual product.

A Venture Capitalist (VC) once backed out of a seed round I had open for my startup because we didn’t have a hacker in our founding team. Even though we had 5 developers at the time, the investor felt that there wasn’t a clear leader for the technology aspect of the company.

The Hipster

Is focussed on design, user experience, brand identity. Basically making sure whatever the hacker makes is ready to go to market.

The Hustler

Is reponsible for making that money! He finds way to monetize products, optimize conversions and creating business models that are profitable in the long run.

I fall under this category, and so will many other poker players. For the past 10 years (and maybe even longer), my brain has been occupied with creating exploitable strategies to optimize my income. This skillset transitions well in business. And you’ll be ahead of the curve as a poker pro.

4. Money trees is the perfect place for shade

And that’s just how I feel.

Past and future funding, cashflow, burnrate and revenue. Look at all the financial numbers to paint a picture in your head of the finances of the start up.

When you’re looking at a financial model or prognose of a startup. They are usually full of assumptions. This can relate to, revenue growth, user growth, better conversions, bigger margins and more.

You have to ask yourself and the startup “what are these assumptions based on?”

Are they tested on small samples? Is there a similar business out there showing similar numbers? Or are they just guesstimations of a founder who is trying to pitch for an angel investment?

I tend to press on the assumptions, to test if the founders can defend them with statistics. If that satisfies me, and I believe there is a significant chance of future funding I check off two important boxes and continue with my due diligence process.

Another huge plus for me is if a startup is lean, meaning they minimize their burn rate until they validate their assumptions and its time to grow.

5. Techstack

I have limited coding knowledge, as many of you. So what can you look for in a techstack?

Well, you can have companies or developers to audit the code. But this only works if the startup is willing to share it, which rarely is the case as they need to protect their intellectual property (IP).

If they claim their technology is groundbreaking, disruptive, or revolutionary (as they usually do), it’s wise to request a competitor analysis.

Once you receive it, check if the competitors are working on similar tech. If so, it’s not as innovative as presented.

Often you will hear back “we are the first working on this”, meaning they have a huge opportunity to grab a big piece of the market before anyone else can, also know as “first mover advantage” . In this case, you’ll need to do some internet research to find out of if there are any rivals out there. Often there will be.

Now if there is really no alternative solution to the problem they are solving, have a look at their vision one more time. If you’re still a believer you are one step closer to your first angel investment.

6. Sit Back and Enjoy The Pitch

My favorite part, listing to the pitch of a founder.

Why do I enjoy it?

Well, I hate pitching myself. I’m uncomfortable, sweaty, nervous, conscious of my posture and voice, and more. I can continue, but you get the gist. I even got some pitch coaching, to help me over a few hurdles I have.

Pitch Coaching in Amsterdam

So when I see another founder pitch, I relate to their situation and follow the story they are pitching, while I don’t do any of the heavy liftings.

It’s important a founder can share his vision, supported with data, and make his audience believe it. As many startups are bootstrapping, they will need more funding in the future. The money I will put in, won’t be the last capital they need. So I want a founder to sweep me off my feet, give me goosebumps, and get me excited about the journey we are about to start. If the founder can give me that feeling, I’m sure he can give it to others too. This increases the chances of future funding and success.

7. What is My Expected ROI?

The ROI with angel investing is best compared to the ROI of poker tournaments. Angels will lose their buy in’s often until they back a winner.

Depending on how good you are at picking your bets, your ROI will vary. To give you a benchmark, the average VC has an ROI of 25%. But like tournament pro’s, the range of ROI’s can be between 5-100%.

Warren Buffet once said, that if he manages less than $1 million USD he would yield over 50% a year.

Why is that?

The spots that have the best ROI, often don’t require a bag of money. Startups are careful not to give out too much of their equity in the early stages of the company. As they expect the value of the shares to go up, they are trying desperately to hold on to them. So early fundraising rounds, usually have low caps on them, ranging between 50-500k.

Now imagine managing $100 million hedge fund, would you bother making 50k bets? You probably don’t have the time to filter through all these small bets, and only look at companies that are later stage and require more capital.

In conclusion, your ROI depends on several factors. I’m aiming for 20% on my angel investments.

8. When to Become an Angel Investor

When you’re considering putting your money into a start-up, you want to check your risk tolerance.

As your investment is not liquid (can’t cash it out), you don’t want to feel stressed at small setbacks in a company. Most angels invest in early-stage startups because they can rise in value quickly with each future funding round.

However, the flipside to this is that it’s a high-risk investment. The earlier a startup is, the riskier. Simply do to the fact that there is not a lot of money in these businesses. If the runway (time the business can cover the cost) is short, small setbacks can lead to bankruptcy.

I like to invest in startups that are at Seed funding stage. These companies generally have their assumptions tested and show growth in their results and revenue. They are looking for capital to add additional features to the software, to spend on growth strategies to increase revenue, or expend their team because the workload has become too heavy to handle.

Generally, they are also preparing for bigger funding rounds (series A). Ironing out the bumps in their businesses and getting ready to pitch to VC’s.

The last startup I backed is doing their second seed round, while preparing for a series A round later this year. Among their current investors are a few high profile individuals, plus a respected startup accelerator. Having high profile investors on board validates the potential of a growing start up. So for me, it was the right time to jump on board.

9. Growth hacking

As I mentioned before, poker players are great growth hackers. When I started my first online business, I was naturally searching for exploitable data of my user’s behavior. So I can optimize lead generations, income, and more. Only later I realized, this was considered growth hacking and it’s a rising trend in online marketing.

Now with this specific skill set, which is often missing at startups, I am in a position to add more value while angel investing.

This is often a win-win for a founder, as he can reduce the cost for growth, while I advise on growth strategies with minimum cost.

You don’t have to be an active investor at each company you stake. But I like being involved once I put my money in. I believe if I can help them grow, my ROI improves. So why not put in that effort?

If you have knowledge that can help your investment, don’t feel shy to share it!

9.5. Sweat Equity While Angel Investing

This last one is the least important one of everything I listed above regards to angel investing. And therefore, it doesn’t even deserve a full number 10.

But, it’s worth noting that it’s fun to invest in startups. Not only are you cheering from the sidelines, while the founders fight to grow their business. You often are in a group chat or investor newsletter, where you receive updates on the plans and progress of the company.

This is a great learning opportunity for you, which you should grab with both hands. There is nothing more valuable than learning from the successes and mistakes that CEOs endure.

Final Words

I’ve been on both ends of this spectrum, either raising funds or investing. So it was an interesting topic to blog about.

I’m creating a group of (former) poker players who are interesting in this subject. This way we can sharpen each other’s tools and hopefully improve everyone’s ROI. The group will be closed for curated members only, who are seriously looking into this or have experience with it. Kind of like the old poker study groups we all loved back in the days.

If you are solo and looking for a group to study investing, specifically in startups, contact me and we’ll have a chat.

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