The #1 Angel Investing Mistake
The list is of angel investing mistakes is an awfully long one, equally as long as the list for liquid investments, plus a bunch more. On the too-aggressive side: believing the hockey stick, ignoring the management holes, and overestimating product acceptance. On the too-conservative side: my favorite startup myth, thinking that because competitors exist, opportunity doesn’t. That logic is behind some of the biggest groans of regret ever, including the countless folks who said “no” to Google early on for that reason.
Despite all the competition, there’s a clear number one error in my book: failure to keep dry powder for the inevitable, yet somehow always unexpected, “re-opened” first rounds. My experience is that the best yielding exits come after a couple of re-ups at something right around the initial valuation. This isn’t surprising. After all, the early stage world’s favorite word these days is either “pivot” or “iteration.” We know that there will be dramatic twists and turns, which is why the “bet on the jockey, not the horse” mentality is so prevalent. And yet, somehow, many angels don’t plan accordingly.
Sure, you’ll always have your stake in the company that needs just a bit more capital to get going. But, obviously, you’ll get diluted in the process, and sometimes very badly. Some of the most successful early stage investors are exactly those who look for cash-strapped but promising companies, and then come in with heavy-preference money the entrepreneur can’t refuse.
Obviously, this doesn’t mean that you should pony up new cash every time you’re asked. And it doesn’t mean that you have to play at every subsequent stage of the company’s development. But it does mean you should have the resources and patience to stay in the game when that bootstrapping startup misses a ship date, or has an early customer go out of business. It also means you need to stay informed enough about the company along the way to make an informed gamble on which companies have hit the inevitable bumps in the road, and which are actually in the ditch beside it.
Nothing is more frustrating than having been “right” about a company, taken big risks to support it, and winding up with almost nothing on the exit. Don’t let it happen to you.
All opinions expressed are those of the author, and do not necessarily represent those of Gust.
Written by Bob Rice
You might also be interested in
Canada has not tapped its female angel investor potential – yet.
The female angel investor conversation has been discussed inside and out. From TechCrunch, BetaKit to the Financial Post, there have been more than a few arguments made about the lack of female representation in Canada’s early-stage investment community and the benefits of tapping into this financial resource.
One of the most common questions we get is: What are the biggest challenges and rewards of angel investing? High net worth individuals become angel investors for a number of reasons, but the opportunity to work with entrepreneurs and provide guidance to founders is typically high on the list. In this video, angel investor Chenoa Farnsworth explains why, interestingly, both the biggest
Entrepreneurs seem genuinely surprised to find that investors in Peoria or Little Rock are not willing to invest in startup companies at Silicon Valley prices. After all, they just read in TechCrunch that investors funded a company similar to theirs at an $8 million pre-money valuation!
The valuation of startup companies shouldn’t be impacted by location, should they? Guess again!
The first question you need to ask is “What country are you in?” and the second is “Are you an Accredited Investor by that country’s standards?”
If we’re talking about the US and you are NOT at the Accredited level ($1 million in investable assets, or $200,000 annual income), then for the moment you are actually not allowed to invest in privately held startups
First, it’s important to understand that the four platforms you list fall into two very distinct groups.
Kickstarter and IndieGoGo are project-based crowdfunding platforms through which anyone can contribute money, either as a donation or with the promise that they will receive a tangible ‘reward’ of some kind if the project is successful.
Gust and AngelList are equity-based platforms, used by Accredited Investors to facilitate the investment of money for an ownership interest in