By Tim Houghten
What does it take to be a successful angel investor today?
This is the question that we get asked all the time at 1000 Angels, the private investor network that connects startups with investors. Becoming an angel investor has the potential for being insanely profitable, personally rewarding, and even bringing about essential world change. However, as billionaire Shark Tank investor Mark Cuban recently noted in a viral interview, in order to realize these results and sustain them, you have to know what you are doing and have some good luck along the way.
There are some finer mechanics to funding startups and including covering yourself legally, but the bulk of the matter can be boiled down to these five crucial elements…
1. Deal Flow
There are certainly some advantages to investing more money and energy in fewer startups. However, It is important not to spread yourself too thin. Whether needing broader diversification, more opportunities to put your pent up capital to work in, or simply more choices of startups to select from, deal flow is important. Having options is a good thing.
2. Curated Investment Opportunities
More deal flow is great, but the type of deal flow you are receiving as an independent angel investor can be even more important. You may be only interested in healthcare and medical related startups, or early stage opportunities versus those on the brink of IPOs. There is a lot to choose from with an estimated 400 million plus entrepreneurs, often with multiple startups. For example, Tanya Prive (@TanyaPrive1), CEO and co-founder of 1000 Angels, says “only 3% of the startups that apply ever make it in front of our investor community.” This type of deal flow means preserving your time, focus, energy, and ensuring you are targeting the best opportunities. You should expect entrepreneurs you fund to maximize their time, so why not lead by example and be efficient with yours when looking for opportunities?
3. Selecting the Right Matches
Even after narrowing the field down to quality startups with good chances of success, it is still important to select new ventures to invest in that are a good match for what you care about. For some angels it may be just about the money. However, you can take a more active role that will help the venture beyond simply providing dollars, such as by making introductions and being involved as an advisor. Cause driven opportunities and impact investing are also ways to be passionate while maximizing your investment. So what do you care about? What drives you?
4. Invest in What You Know
The very nature of startups is to disrupt and change things. This can make it challenging to find a new venture that angels understand. However as Warren Buffett consistently reminds us, it is critical to “invest within your circle of competence.”
Try looking for startups with an element you do get. Perhaps it is a tech startup solving access to a healthcare challenge you are familiar with. Maybe it is a technology solution you are passionate about that is being applied to an industry you have experience in.
5. Invest in Extraordinary Entrepreneurs
There are thousands of new ideas and and concepts springing up daily. The difference maker often however is not the idea, but the strength and energy of the founding team. Follow the biographies of the most notable entrepreneurs and you’ll find one common thread. It is not IQ or where they went to school. It is how dedicated and relentless they were once they latched onto a mission. It is those that are committed enough to keep on going through the challenges and tougher days that will stick it out long enough to experience the fruits of their labor. Talent and experience plays a part, but without toughness and grit to get you through difficult times, those founders may not survive. Even a heavyweight investors like Mark Cuban can have run into these issues, as he did with Motionloft. It is key to find the right business partners along with the business idea.
Select both great founders and great ventures to back. Look beyond making money, stay alert to the boundaries of your circle of competence, and establish curated sources of deal flow.