Successful Angel Investing
In this article — How and where“angel investing” emerged; how to avoid “dog” startups; and how investors anywhere can invest in startups everywhere.
How it Started
Angel investing emerged from the desire of startup ecosystem participants like exited founders and individual investors to help early stage startups bridge the funding gap between friends and family funding and institutional funding. Angel investing is a way for experienced individuals to mentor, interact and invest in the next generation of startups. As such, angel investing provided significant emotional and social rewards, and secondarily a way to financially benefit.
Originating in the San Francisco Bay Area, the concept of angel investing expanded to other regions of the United States, and currently additionally serves as a means to support startups in local ecosystems around the world. But, for those outside the Bay Area (and its concentration of sophisticated players and startups), financial rewards of angel investing become less probable. The powerful personal rewards are not our concern here — our focus is on maximizing financial rewards from angel investing.
Simply put, traditional angel investing — especially outside the SF Bay Area — does not make money. Even great startups with huge markets and amazing teams fail. All the time. And it is not possible to consistently invest in one to three startups yearly and expect such a strategy to consistently produce an exit with a high enough return to make up for all the failures. It is “betting against the house”; and, while you’ll occasionally get a pot of winnings, mostly you go home a loser.
Why’s it So Hard to Win?
Because it takes investing in a minimum of 10 to 15 companies per year, over an extended period, to ensure investing in at least one or two companies will generate the kind of kick-ass superior return that has fed the Silicon Valley mythology. Venture Capital firms embody this — the average VC invests in 30 to 35 companies over the three year investment period of the typical fund. Individual angel investors also have a difficult time discovering early stage startups outside their immediate geographical region. This is not a problem in the SF Bay Area, but is a problem nearly everywhere else, since the pipeline of great startup companies in any individual region is limited in number and generally concentrated in a few industry verticals, making diversification difficult.
Dogs & Due Diligence
One can hunt at the Demo Days (periodic events where organizers bring together groups of “hot” startups and have them pitch to invited investors on a stage, “Shark Tank-style”), but if a company isn’t funded by the time it appears on stage at a demo day, it’s probably a dog, even if it is in the Bay Area. And while doing your own exploration outside your region is possible, doing effective due diligence is far more difficult, expensive and time-consuming. Even more difficult is efficiently managing more than a few investments, and having meaningful understanding of what is going in the company after you invest. Unless you get a board seat, which would be extraordinary, you will not get actionable information, but most certainly will be hit up for bridge loans and additional capital. Most likely these will be throwing good money after bad. In the end, the average angel investor has an exciting experience but loses their investment.
Invest Outside the Valley….
So if you are not a Bay Area insider, and your goal is to get the personal rewards of angel investing as well as the financial ones, there is a solution. Co-invest in VC-style funds via companies such as ExtraVallis. We offer investment pools of 5 to 12 companies defined by industry vertical. We offer up to 10 pools a year in which to invest, with a minimum investment of $50,000. By investing in a portfolio of 10–15 companies a year, angel investors increase their odds of investing in unicorns — mitigating the risks of angel investing and reaping the rewards earned by institutional investors.
…with ExtraVallis
Additionally, you get the benefits of intensive, consistent due diligence, curation by knowledgeable managers selecting from every U.S. region as well as globally. By providing pre- and post-investment metrics and data on our startups, we offer more transparency than nearly any other means of startup investment. ExtraVallis gets better valuations because we offer startups a means to access capital on a regular basis, without having to spend all their time in a constant fundraising cycles. This means they can focus on their business, increasing the chances of success and giving them more flexibility to offer better terms. We offer standardized deal terms, minimizing the administrative and legal costs to you.
With ExtraVallis angels can build an investment strategy, easily implement it, and reap the rewards of an extensive pipeline, standardized diligence, ongoing transparency and the means to build a risk-minimized portfolio. If your goal as an angel is to reap financial rewards, ExtraVallis is an investment platform you should look into.