Investing real money into startups is as risky as it is respectable.
At TECHdotMN, we hold entrepreneurs and the investors who back them with their own resources in the highest regard.
Talking on the record about personal angel investing activities can be challenging and we thank you Daren Cotter for sharing:
What does angel investing mean to you?
Angel investors are an important component of a startup community. More active Angel investors leads to more startups raising capital, which leads to more successful startups and exits, which leads to…more active angel investors (a virtuous circle). So the most important aspect of angel investing to me is supporting the startup community.
Because I’m also an Entrepreneur leading a high-growth company, angel investing to me is also an opportunity for continuous learning. I learn something new every time I talk to an Entrepreneur, which makes angel investing an excellent long-term investment in myself.
When did you get into it and why?
I started angel investing in 2013 for many reasons. I wanted to diversify my investment portfolio and include the “startup” asset class. I wanted to network with other investors to learn how they think and make investment decisions in order to make myself a better entrepreneur. And I wanted to do whatever I could to help nurture the growing tech community in MN.
How many investments have you made to date, into what, and how do you?
I’ve made about a dozen investments in two years focused on technology companies with significant potential to scale. I’m industry-agnostic but am particularly interested in SaaS and Mobile. I generally like to see some customers + revenue with clear potential to scale quickly with access to capital. I’m especially interested in companies that can benefit from my expertise and/or companies that have synergies with InboxDollars. I don’t lead rounds; I co-invest along with other angels, VCs, and Gopher Angels members.
What have you learned?
I’ve learned a ton! Way too much to list everything, but some highlights include:
- Companies who are successful will most likely have future funding rounds. As an angel investor, you want to participate in these rounds in order to maximize your potential return. This could mean doubling, tripling, or quadrupling down on your initial investment, so you should plan accordingly. You should also make sure the terms of the investment enable this option for you.
- Entrepreneurs who are fanatical about the product will likely build a great product, but not necessarily a great company (and thus investment opportunity). Entrepreneurs who are thoughtful about exit event and the associated return for angel investors are more likely to achieve it.
- The best Entrepreneurs communicate regularly with investors, especially when things aren’t going well. Entrepreneurs who wait until they need something (e.g. additional funding) will find it very difficult to get the support they need.
What are three do’s and three don’ts when it comes to interacting with prospective investees as an angel?
- Ask questions and pay attention to how the question is answered, not just the answer. This will help you understand how the Entrepreneur thinks, which is more important than the answer.
- Make sure the Entrepreneur has diligently thought about potential exit events. A cool idea without an exit is not a good investment.
- Give feedback to the Entrepreneur. If you’re passing, tell them why. If they’re a good Entrepreneur, they’ll appreciate the feedback (even if negative) and will learn and grow from the experience.
- Lead the Entrepreneur on. If you know you’re going to pass, don’t ask more questions unnecessarily. Similarly, if you’re not actively making investments, don’t pretend that you are. It’s not fair to the Entrepreneur.
- Be arrogant. You have something the Entrepreneur wants (cash), but remember they have something you want as well. This is a symbiotic relationship, not one-sided—act as such.
What advice would you have for other accredited investors looking to get started?
Before you make any investments you should understand the basic math and plan accordingly. Key variables to understand include: 1) ~70% of angel investments will be complete losses, and 2) only about 1 in 15 angel investments will be “home runs” (10x return or more). Since ~70% of your investments will be complete losses, you NEED at least one home run in your portfolio in order to profit. To be reasonably sure you get at least one home run, you need to make 15-20 investments. Therefore, you should only start angel investing if you are committed to make at least 15-20 investments (it’s OK if this is spread across 5-10 years).
I also recommend learning about other important topics: basic investment math, the difference between priced rounds and convertible notes, and key items on a term sheet.
However, you don’t need to be an expert on these topics to get started. Ultimately, the best way to learn is by doing. Start by networking with angel investors that you’ve seen actively doing deals. Your network will determine your access to investment opportunities, so invest a lot of time in this area. Joining an angel investing group like Gopher Angels can be a good way to meet other investors, get access to deal flow, and learn as you go.
Lastly, read all of the essays written by Paul Graham, Founder of Y Combinator.
Is the anything you would like add?