Playing with angels: Eight tips for becoming a successful angel investor

Entrepreneurial culture in Australia has never been as buoyant as in the last two years. More people have given up their 9-to-5 jobs in pursuit of something bigger. Driven by stories of success, others have dared to dream big and make these dreams a vision.  

Likewise, more investors have joined the movement to support innovation and, like Ron Conway who invested in Google, Twitter and PayPal, reap the benefits from a success story.

Testament to the growth is the fact that in 2006, there were only three angel investor groups in Australia, there are now around 15 (compared to 400 in 2010 in the US). New entrants include individuals such as Michael Malone, founder of iiNet, and groups such as Scale Investors and Blue Chilli.

Just 10 or 15 years ago, angel investment was something only millionaires and the uber wealthy could afford or even think about. With startup businesses now needing less capital to launch, the investment amounts are shrinking – opening the market to mid-level players and investors.

Most investors I come across are equities traders, entrepreneurs with one or two successful businesses and/or exits behind them, people looking for an alternative to property investment and those looking to break away from corporate structures. For some, this is an alternate – albeit risky – way to be involved in a startup without putting in the initial effort.

My journey into angel investment started from a background in trading equities. I used social media to grow my networks by offering small social and ethical investment grants to other startups – focusing on issues such as literacy, women-led initiatives and youth empowerment activities. This gave me a foundation to start my angel investment portfolio. In a male-dominated market, I taught myself everything there is to learn about investing. I spoke to people, networked, read and learnt by taking small steps.

For those thinking of going down this path and investing about $25,000 to over a million, here are a few things to consider.

1. Have ready access to funds

Just like buying a house, the right opportunity can come by and be snapped up before you know it. Rather than trying to liquidate stock or rush to access other savings, keep the 10% of your net value (the general startup investment rule) or whatever else you are willing to part with handy. This helps in starting a deal with the confidence of having funds accessible, rather than backing out after negotiations.

2. Establish a portfolio

The drawback to having fewer investments is that when loss hits (as it is most likely to), it hits harder. Starting small and establishing a portfolio of about 10-15 companies, ideally from different sectors gives you more room to breathe. Known as the “spray and pray” strategy in the industry, spreading money around in early stage startups will mean that only a part of your portfolio needs to perform well. It also gives you the freedom to invest big in a groundbreaking idea.

3. Scaling strategy

One of the common challenges we face in Australia is the ability of businesses to scale after reaching a certain growth point. During a recent trip to the US, I noticed that Australian startups have a harder time scaling their business – especially globally.

Although scaling usually involves Series A, B or venture capital funding, knowing a company’s strategy to achieve it in a challenging market such as Australia is important. Ask the right questions initially so you get a realistic view of how the business will achieve its vision.  

4. Diversify, diversify, diversify

Look beyond popular investment portfolios such as technology services investments at other areas such as biosciences, education, handmade crafts, entertainment production, etc. Often, this requires going beyond the pitches sent your way to find a company that fits your interest and presents a growth proposition. Look at macro trends that are shaping the market.

5. Join a group

There are many active angel groups/communities that you could join in Australia including Brisbane Angels, Sydney Angels and Scale Investors. The benefits to being part of a group are reduced risk, lower investment required for good products, access to combined brains trust and wider networks. First time investors can also benefit from mentorship by experts.

However, groups will need you to invest a certain amount every year as membership fees and also require you to be present at more events, meetings and screening processes.

6. Think about your timing

Know at what stage of the business you want to invest in. While early investment into a business has the potential of getting more equity for your money, the risk is higher due to teething concerns of the new venture and lack of established market acceptance of the product.

Investing after the business has been operational for a few years will increase the valuation and often results in less equity; but is less risky and offers quicker exits. 

7. Personal investment and history of the entrepreneur

Determining the value of a startup is more art than science. Your judgement is based on the history of the entrepreneur and how personally they are invested into the company. Some investors only look for entrepreneurs who have successful exits under their belt. Others are willing to bet on the killer idea. Know that neither of these options is failsafe.

8. Playing an active role

Investors who are keen to play an active role in their investment should consider the dynamics of working with the team. Time and situation permitting, working with them for a few days or weeks at no cost could be a way to assess the business and entrepreneur fit.

The majority of startups fail, which makes angel investment one of the riskiest ventures. Be prepared to lose money and be comfortable with how much you can afford to lose. Treat success as a pleasant surprise. After all, you could be the next Ron Conway, whose Google investment became a 400x cost winner, or Peter Thiel, who was the first outside investor in Facebook by putting in $500,000 for a 10.2% stake in 2004.  

Renata Cooper is the chief executive of Forming Circles and an angel investor.