How Smart Angels Invest? – A Guide to Creating Your Investment Strategy

Investing in a startup has become more of a trend recently as it promises to return more than what it’s originally worth if it becomes successful. Some of the startups that made it big include Uber, Facebook, and Twitter. If you believe that you have enough capital to invest in the startups, but don’t know how to begin and what strategic direction to choose, it is better to start by analyzing the strategies of smart and successful angels; the type of investments they have in their portfolio and the course of their invested money over a period of time.

It may take some time to master the skills of these angel investors, but don’t get disheartened by it because it will eventually be brought to fruition as you learn to take the right decision. Even the successful investors made plenty of mistakes before they reached this position. Following are some of the things some of the well-known angel investors believe in when they make seed-stage investments.

Investing in People

One of the most famous angel investors of today is Ron Conway, who has made an investment in a number of successful ideas in the past decade. According to him, the most crucial element to consider when you invest in a startup is its team. He said that the idea of an entrepreneur changes and evolve with the passage of time, therefore, it is important to invest in people.

He follows a common strategy called spray and pray by making a large number of small investments. Not every investment made by him guarantees a successful exit, but he certainly has a huge network with different types of investors who look forward to joining the league of these angels.

Capital Efficient Business Idea

Another successful angel investor, Reid Hoffman, who is also a founder of LinkedIn and has made an investment in Flickr, Facebook, etc., believes in innovative ideas that have a tendency to scale efficiently. Whenever he invests in a company, he looks for a product that is unique, has the potential to attract millions of users, and most of all, it can attract funding as a business grows.

Identify the Products that Appeal Consumers

Chris Sacca, an angel investor who has invested in Instagram and Twitter, looks for a product that will be in demand once it hits the market. An example can be his investment in Turntable.fm, in which he invested a lot of time, because he realized it in the beginning that users would become engaged in this investment.

Team Involved in Materializing the Idea

Another well-known name in the angel investors’ community is Chris Dixon, a co-founder of Hunch. He invested in Skype and Milo. Moreover, in 2010, he was ranked number 1 investor in Businessweek. Although, he is always on a hunt for high-tech startups, yet he believes in diversifying away from the risk, and so also invest in startups that do not fall in the category of high-tech. However, apart from the technology, he focuses on the team involved in bringing an idea to reality, and this, he believes, is a crucial part of his investment. He said that as environmental changes occur, the shortcomings in the original idea start popping up. A good entrepreneur would always adjust to the changing environment, which can only be seen through the passion of the team involved.

Reasonable Compensation

Everyone must’ve heard the word PayPal; its co-founder who also invested in Facebook, Yelp, LinkedIn, and Friendster, Peter Thiel, said that he keeps his focus on what a CEO is paid. If these people are being paid a lot of money in the company, the chances of an investment to run out quickly are very high, but if the CEO is paid less than average, it depicts the alignment of his interest with equity shareholders. Therefore, he sees how reasonable a compensation is in the company when he invests.

Provides Solution to the Problem

A famous celebrity, Ashton Kutcher, has only been on the field for four years, yet, he has made substantial investments in high profile companies, such as, Skype, Zaarly, Flipboard, AirBnB, etc.

According to him, what he looks for in a company is the tendency of its product to solve a problem, and the user it engages who demand that solution.

To summarize, whenever you plan to invest in a company, you can choose one or use a blend of these ideas in order to examine factors that may lead to finding a successful deal. All in all, what they focus on is the entrepreneur; the team he assembles, and the idea he represents that determines whether an investment would be profitable or not.

What do Social Investors Want?

Funding is a lifeblood of any startup. It is a crucial element for the survival of any business.

For social entrepreneurs, it is important to take steps in the right direction if they wish to secure funds. This is the reason why they have to learn what social investors really want and what their expectations are. Having a thorough understanding of your businesses increases the likelihood of attracting the right investor. Therefore, the vision of your business must be clear and well-focused.

Below are four main guiding principles every social entrepreneur must bear in mind in order to secure reasonable funds to keep their businesses running.

Financial and Social Objectives Must Be Well-Integrated

Social entrepreneurs have to be convincing in order to succeed in winning the trust of an investor. They not only should have a persuasive social mission, but also present a strong business case. If both these elements are properly aligned, they create a strong case that can make an appealing financial outcome to widen your impact. A great example of that can be Taxi-Electric that runs the cars on electricity and charge a fair price for providing taxi services. In addition to that, they also provide job opportunities to people who experience long term unemployment or are students. Both of these core elements have enabled them to sell as many taxi rides as possible.

Another well-known example is Tony’s Chocolonely that produce and sell chocolates. Moreover, it opposes child labor and slavery at the same time by partnering up with trade firms in Ghana and Ivory Coast to purchase cocoa beans at a fair price directly from farmers. These organizations are making an effort to spread a positive message while growing their revenues and returns.

Investors usually look for such businesses that offer a combination of both. It is quite likely that angel investors would invest in visionary ideas and would try to improve the business side of these social startups, whereas, investment funds tend to focus on the business side in order to assist them in aligning their social goals. Investors normally expect social entrepreneurs to have a deep understanding of their financial as well as social goals along with having an integrated approach and clear vision. It is important to optimize your plan through discussion with your investor.

A Well-Balanced and Strong Management Team

It is important to have a well-balanced team of professionals.

Investors always stress the importance of having a solid team that has its goals aligned with the goals of a business. Having a group of professionals who are motivated to invest their time and expertise in a social enterprise is considered quite healthy for a business as it is an indicator of good future prospects. Financial institutions and venture capital firms specifically look for companies with strong teams while taking investment decisions. Therefore, it is recommended to add a diverse group of people in your team at an early stage, because having more than one person behind an idea shows its strength and persuasiveness.

Measure Your Impact

It is not easy for social firms to measure their impact or quantify its outcome and they blame the lack of resources for not being able to do so. Investors, however, consider the impact measurement a strong requirement before they invest in a business. Although, they understand that it is difficult to measure the social impact, yet, they emphasize that it can prove to be very helpful for social entrepreneurs to maintain focus on their operations and identify clearly what their goals are.

The question remains how to get it done. The key is to start small, for example, measure the number of people employed by a social enterprise and the positive feedback it receives. There is no doubt that every method comes with its limitations, but one cannot deny that you can, at least, measure your progress with it. Taking the question “why” is it you want to measure the impact can play a vital role in integrating your financial and social goals.

Avoid Deviation from Your Core Mission

It is very important to stick to your key mission. The deviation can cost a business a lot in terms of losing their financial wealth and losing their core values. It usually occurs after two to three years into the business, especially when new employees, leaders or investors start showing interest.

For venture capitalists, the shift from a mission is one of the major issues that arises in social enterprises. It happens when they start deviating from their balanced view of pursuing financial and social goals together, and instead, move toward financial returns at the cost of their social mission. If such deviation occurs, it detracts the social entrepreneurs from the original mission they discussed with investors.

It is to be noted that moving away from the original mission is not a bad thing as long as the expectations of the enterprise and investors are aligned. Keeping the investors on the same page, and having their agreement is crucial for the success of any social enterprise.

Social Venture Capital

Starting a business isn’t easy, and getting funds is even harder. But if your business is involved in social or environmental activities, access to funds is even more difficult. One of the things social enterprises repeatedly talk about is a tough time they face finding people who are interested in giving them funds.

Although, there are different types of investors who are interested in investing in these firms, it is not easy to find capital. However, the trends have started to change in the past few years with the rise of social venture capitals.

Social Enterprises

These are organizations that employ commercial strategies to improve the well-being of a society.

They have a revenue generating business set up with two objectives, i.e., to attain social, environmental, and cultural targets and to make profits. On the face of it, many of these firms operate in the similar fashion as traditional businesses. But it’s only when you look more carefully, do you get to see its distinct characteristics, with the social mission being a center point and income generation playing its role as a support system.

Social Venture Capital

Social Venture Capital isn’t the same as traditional Venture Capital, as investors seek to look past the profits and risk/reward figures. Some of the common causes supported by them are to have a clean environment, elimination of poverty, and social justice. Instead of keeping their focus on investment returns, they tend to look for ventures that show profitable prospects along with the mission to bring positive change through their product or services.

Social VC – Changing the Name of the Game

Normally, traditional VC firms prefer to invest in those emerging businesses that show great potential to grow in monetary terms. So, when the business takes off, it’s a win-win situation for venture capitalists as they retain a portion of profits. Social VC follow the same pattern. They look for startups, assess their product and potential to grow in future. By investing their money, they become entitled to receive an equity share in a business.

According to the Global Impact Investing Network (GIIN), there are more than 300 VC firms that seek double bottom line businesses (companies with both profit and social impact). In a survey conducted by GIIN of 125 funds, it was found out that 25 to 50 percent of them follow the VC model or a private equity model.

So What Triggered the Social Wave?

Brian Griffiths and Kim Tan said that the social venture capital has partly been triggered by a shift in the role of business in developing countries that have a history of misusing the resources and poverty-stricken members of society. Another reason was the failure of massive aid to bring significant change.

This is why well-off venture capitalists expressed their desire to apply high tech style innovation to their altruism. Chairman of the Big Society Capital, Sir Ronald Cohen, said that impact-investing can balance the course of crime, poverty, and homelessness for green energy, education and a lot more.

Traditional VCs Shifting their Focus?

With the emergence of social VCs, a growing interest has been observed in traditional VCs as well. A former Wall Street Journal writer, David Bank, said that institutional funds that have given rise to social VC are looking at markets like sustainable timber, agriculture and green real estate. An eyeglass maker, Warby Parker, donates glasses to these businesses so they can sell it in emerging markets. They managed to secure around $100 million venture capital from Tiger Global Management, Spark Capital, General Catalyst and a lot of other firms.

There are many venture capitalists who are making small investments, for example, an outdoor gear firm, Cotopaxi, attracted $3 million from New Enterprise Associates and several other investors. Overall, it has secured around $9.5 million, showing that Silicon Valley can see the potential to generate returns in these businesses.

Venture capitalists actually get attracted to the fast-paced growth of these businesses, which is gaining popularity with more-than-ever-before socially aware consumers. Social VC is not generating high profits as of now, but it was the same for venture capital funds when they first appeared.

Venture Capital and Equity CrowdFunding Co-Existence

It’s been more than four years since the Jumpstart Our Business Startups (JOBS) Act has been enacted, and its democratization has already started with a few Regulation A+ CrowdFunding (CF) offerings officially recognized by the Security and Exchange Commission to raise funds.

Given the increasing interest in Equity CF and reward based CrowdFunding, venture capitalists would find it hard to seize startups seeking investment opportunities as they prefer to raise funds via crowdfunding. On one hand, it has ignited the fear in some VC firms as they believe it could disrupt their industry by creating a hindrance to attracting young companies, whereas, other venture capitalists are of the notion that startups looking for both seed and later stage funding can utilize CF and VC funds alongside each other.

This gives rise to an important question

Whether Equity Crowdfunding and Venture Capital Co-exist or Not?

The answer to that is yes.

Despite the apprehensions raised by VCs, both the sources have turned out to be successful for startup businesses, as they offer two unique routes to raise funds. Although Venture Capital makes up a large part of the financing, yet, crowdfunding can add an extra element to it and help companies by allowing them to raise money quickly and in a more cost effective way.

CrowdFunding Provide Real-Time Feedback

Every VC investor seeks strong ideas that have a potential to provide high reward with minimal risk. With equity CrowdFunding, VCs have the advantage to get real time feedback as they observe the public response to see whether a product or service gain traction. According to an article by Deborah Gage on the Wall Street Journal, three out of every four startups (supported by VCs) fail. However, if it is supplemented by Equity CrowdFunding, the number can reduce to a minimum. As David Loucks, CEO of Healthios, rightly said that both the sources of investments complement each other. It can be seen as a sequence, wherein, CrowdFunding plays its part and then Venture Capital plays its role.

He further said that CrowdFunding doesn’t necessarily have to be restricted to the seed stage; in fact, startups can use it at a later stage to help strengthen their deal. He went on to say that instead of going to the capital markets, companies can turn to CrowdFunding in order to arrange funds around a specific initiative, as there is certainly going to be an investor in the market who would seek a partnership with a top buyer.

Challenges of VC and CrowdFunding Partnership

There is always a risk, to VC firms, of getting involved with scores of other equity investors. Loucks said that VCs have to be strict in ensuring the credibility of the sources of funds that a CrowdFunding platform represents.

Lynn said that there can be a situation where companies coming to the Venture Capital round, with thousands of shareholders if they find successful CrowdFunding offering, which complicates the capital structure, especially for Venture Capitalists who want to have a lion’s share in the business.

It also reflects a tough choice on the company’s part that seeks funds through CrowdFunding prior to attracting VC money.

Venture Capitalists Can Bring Their Own Skill Set

When it comes to CF, Venture Capitalists can go with the number of structures that allow them to co-invest in a company in tandem with new crowdfunding methods. For example, VCs might get access to preferred stock when CF investors may only get common stock. Moreover, VCs can also maintain control provisions, including anti-dilution measures so that rights attributed to them are not applicable to CF shares.

These arrangements can be quite fruitful for startups and investors alike, and in many cases, VCs can boost the overall value of an enterprise, while structuring arrangements in a way that meet their business needs. They can bring connections and market exposure to the table. As a result, new companies get to raise capital, Venture Capital firms get validation, and CF investors get the advantage of VC guidance and experience. Therefore, it can be fairly said that with the right strategy and partners, both the VCs and CF investors can co-exist.

Crowdfunding and Venture Capital

If startups manage to get funding from a venture capital firm (VC) or angel investors, they mark it as a successful milestone.

However, in the past few years, another investment vehicle has been introduced in the financial market to fund innovative ideas called CrowdFunding (CF). It has been changing the game ever since its inception and it is a new form of raising money to finance ideas. Unlike other forms of investments, such as, seed funding, angel investing, VCs or bank loans, CrowdFunding actually enables startups and entrepreneurs to invest in their business with a large amount of capital supply. Before going into detail, let’s look at what crowdfunding actually is.

What is CrowdFunding?

In simple words, CrowdFunding is a mean of raising money through a large amount of individuals, who are requested to fund an idea on a CrowdFunding website with a small amount of money. This phenomenon depicts the wisdom of the crowd, wherein, a business gets an opportunity to satisfy the market demand that was previously not exploited. Having this system in place results in creator getting funds to excel in his creativity and crowd getting a new product, which makes it a win-win situation.

CrowdFunding or Venture Capital – A Better Choice?

This can be a topic of solid debate if discussed in detail, because both sources have their upside and downside. In order to get a clear idea of which one of the two is a better choice, some of the key points have been discussed below.

Ease of Access

There is no doubt that it is easier to access funds via CrowdFunding than it is to raise capital via Venture Capital. You can meet your capital requirement with CF without having to build any connections, and instead, leave the decision to a large group of individuals. Sometimes, VC is hard to access. Despite having actual customers and real revenues, companies are considered small by the venture capitalists.

With CrowdFunding platform, it becomes easier to access a wide array of accredited individuals to fulfill initial capital requirements. On the other hand, regardless of how streamlined the venture capital processes are, there will always be more friction in terms of VC making inquiries and spending more time.

Stability

Stability is a key to a successful business, but it isn’t achieved easily. Most of the startups do not show an incredible growth curve in the beginning. It takes time to find the product/market fit and to find out a scalable way to sell a product. It means startups would need extra time for which, there will be extra financing requirements. In case of CrowdFunding, there is no apparent deal with responsibility and resources to fill this gap. This is where venture capital partners can assist a business to maintain their focus on execution by providing enough cash.

However, it should be done based on TRUST where both the founders of a startup and venture capitalists feel that the investment was done fairly.

Venture Capitalists working with CrowdFunding platforms

Ron Miller, a CEO of StartEngine (CrowdFunding platform), venture capitalists are compelled to use CF, because it asks founders for revealing the strength of their teams and values in the marketplace. He further said that it shows that strong teams and concepts are likely to get exposure in the market, which will draw attention of the VCs and other investors to further invest in their ideas.

For Example, Oculus Rift, a virtual reality system. They raise $2.4 million through CrowdFunding, which gave them the opportunity to rise another round led by Andreeseen Horowitz (VC firm) to raise $75 million.

Both sources of funds have their pros and cons. However, some VCs are now turning to crowdfunding websites to get access to new deals. Having strict timelines, they use CrowdFunding to identify if the idea is worth investing time in.

Corporate Venture Capital vs. R&D

According to a venture capital database (CB Insights), the venture capital market invested $74.2 billion across North America in 2015. The Corporate Venture Capital (CVC) groups participated in 17 percent of the deals in that region, making up 24 percent of the total venture investment distributed to startups that have been fueled by VCs.

This definitely reflected a reasonable improvement in CVC activities as their participation was limited to 12 percent in 2011. Significant growth has been observed in this investor type as an alternative source of funding for new businesses, but only a few know what corporate venture capital is.

Corporate Venture Capital (CVC)

CVC is defined as an equity investment by an established company in a startup business. It can be put together as an independent part of a company or an appointed investment team that is off their company’s statement of financial position. The main goal of CVC is to invest in companies showing high growth prospects. Some of the marquee brands having venture presence in the technology and healthcare industry, include Dell Ventures, Google Ventures, Cisco Ventures, Intel Capital and Johnson & Johnson Innovation.

Corporate venture capital has been one of the most critical contributors in the venture capital ecosystem that has matured over time.

Research and Development (R&D) and Corporate Venture Capital

R&D and CVC are two prominent sources of creating new potential.

CVC can be used as a substitute for internal research and development in creating such opportunities or capabilities. In different theories proposed by Dushnitsky and Lenox (2005), Cassiman and Veugelers (2002), and Gompers and Lerner (2001), there was unanimity on the idea that R&D backs the increasing use of CVC, in contrast with CVC to be used as a substitute for internal R&D. However, not much consideration has been given to how different industries might affect the relationship between these two sources.

Preferred Use of Investment

With the rapid changes in the global market, companies have drawn their focus on research and development investment to strive for achieving short term targets, as VCs are considered too quick to get caught up in the latest thing. But it doesn’t have to be this way. A number of opportunities with the great potential to boost innovation already exist, except corporations are not able to make use of it. One of these means is to use corporate venture funds.

Corporate R&D – Slow and Expensive Investment

Research and development investment is mostly focused on perfecting technologies that are already used by the public. The United States has spent billions on gigantic science projects for years, but the commercial returns were not as expected. Cutting back on R&D is not the right choice either, as Kodak ended up filing for bankruptcy when they cut their research funding and focused on film, and Nokia is now being purchased by Microsoft as they tried to keep their focus on low-end phones.

Corporate Venture Capital – Quick and Cheap Investment

CVC, on the other hand, is better at identifying new regions and is quite flexible and cheap as compared to R&D. During the last 20 years, a number of CVC initiatives gave a boost to pharmaceutical companies that were struggling to catch up with new advancements in bioscience.

The large companies in a corporate sector stay cautious of CVC, as they have seen them distributed ineffectively. For a corporate venture to be a successful mode of investment, its goals should be in line with corporate objectives and the approval of funds should be done smoothly with the same compensation levels as offered by independent venture groups. If a company fails to provide a fair incentive, it is likely to face a consistent flow of desertion. Rewards should always be given if people solve a problem or launch a new product in the market, but they do not necessarily have to involve cash. Recognition can also be a significant reward for such efforts.

Traditional R&D are not good at pointing out threats from the competitors. Instead, it keeps its focus on a specific number of projects that results in ignoring innovative advances that happen outside the company. Whereas, CVC quickly responds to change and potential threats, which allows decision makers to withdraw from any investment that doesn’t seem to be generating revenue in the future. It is highly likely that a creation of the CVC fund would prove to be a breakthrough idea that changes everything.

What do Angel Investors Look for in Startups?

Angel investors have to look for a business that worth investing, but it is not easy to differentiate between a startup that has a potential to grow and the one that is unlikely to succeed in the future. Angel investments are the most popular form of injecting funds into a business, especially a startup. According to a research, business owners are of the notion that it is a plan that attracts the investment, but investors seem to have other priorities.

Angels go for the “Ideas and Founders” and not the “Plan”

An online platform, known as Company Check that provides data on the companies in the UK, conducted a poll where 3000 business owners were asked about what they think an investor looks for while making an investment decision. It was revealed that around 38 percent of participants said it is a business plan, whereas, 27 percent of them voted for sales figures, followed by the founder, business idea, and economy. But the owner of Company Check, Alastair Campbell, was surprised with the results. He recently got an investment of $1 million for his startup called Carsnip. He said that at an early stage, it is an idea and a founder of a business that angel investors tend to go for, and then comes the sales figures and plan.

To further confirm the reasons, another poll was initiated where investors were asked the same question. Most of the investors shared the same notion as expressed by Campbell. Rory Curran, an angel investor of StatPro and Ecodesk, said that after his experience of investing in about 15 early stage startups and going through failures over time, he believes the ranking should be a founder, an idea, and then a business plan (especially the technology). And then comes the question of whether it is scalable, or if it will need significant reinvestment at a later stage. Similarly, former head of global markets at KPMG and an angel investor, Neil Austin said that he goes for the idea, then founder and then a business plan.

Another investor, Rajesh Sawhney, who has invested in about 50 startups, including Little Eye Labs (later acquired by Facebook), said that he seeks an exceptional founder with ingenious ideas and profound execution capabilities. He believes that angel investing is basically about recognizing and nurturing a unique talent.

“Experience” Matters

The chairman of Wyldecrest Parks and investor, Alfie Best, said that he considers cash flows to be a key factor, but when it comes to investing in startups, the experience of a founder along with the companies that are willing to purchase their products is what he evaluates.

Another angel investor from Silicon Valley, John Rampton, said that for a founder to make an impression, it is important to show that a team is backed by experience and credibility, because he believes it is a team that is going to make an impact and not merely the idea.

High-growth Business is a Potential Investment

Angel investors tend to go for startups with high growth prospects as compared to the ones that are likely to grow at a slow pace with modest profits. They hold their expectations high and seek a higher return than they can possibly get from a stock market. Allan Riding, an expert on angel investing and a professor at Carleton University, said, ““For every dollar that an angel puts into a company, he or she would like to take seven dollars out, after taxes, in seven years.”

An entity is likely to win an investment if it builds a business with sound future prospects. According to AngelBlog, angel investors are more likely to invest at pre-money valuations between $1 million and $3 million. By this point, it is probable that a startup has succeeded in establishing itself as something, having a real customer-base, fair valuation, and real revenues. Moreover, at the time of making an investment, they also look for an exit strategy to take a smooth exit.

Scalability

Another key factor that every investor looks for is the scalability of a business. They prefer to invest in startups that require a minimum viable product to get to the market and can scale quickly. For example, the largest taxi company in the world, Uber, does not own any motor vehicles. Similarly, a well-known retailer, Alibaba, holds no inventory. These companies scaled very quickly as soon as they entered the market.

It is important for entrepreneurs and startup owners to value the motivation and concerns of angel investors, because these investors take a significant risk when they invest in businesses.

Is Funding Your Startup with Venture Capital Always the Right Choice?

With the rapidly growing tech-world, it has become quite common for startups to fuel their ideas with funds injected by venture capitalists (VCs). Whenever you pick up a business newspaper now, there is mostly something written about VCs or the early stage businesses that were funded by these investors.

But is it always the right choice?

In today’s fast pace environment, everyone wants to make huge profits as soon as they possibly can. However, as the old saying goes, “haste makes waste.” This is also true for businesses.

Although, venture capital investment may be a good choice for some businesses, yet, it comes at a cost of coping with high expectations held by these investors, which also results in many startups to fail. The fact is, new ventures do not need such investments all the time. Besides, simply because you are a tech-company, doesn’t necessarily means that you have to have your office in the Silicon Valley. There are many companies in the world of technology that grew organically and made it big. Though, the progress was slow, it was steady and made them even stronger as they made it to where they are today. One such success story is of the MailChimp. Started as a design consulting firm, providing email service as a side project, the company touched a revenue of $280 million last year in 2015.

Dan Kurzius and Ben Chestnut started the company in 2000. Some of their clients were demanding a solution to engage their customers by email, so they tweaked some old codes that were used for an unsuccessful online greeting card business. For the next few years, this project was run parallel to their main business. In 2006, however, they started having reservations. Having the entrepreneurial family background, both the founders were passionate about helping small businesses grow. Despite being in a critical state of its growth, they knew MailChimp was a low cost marketing channel for small scale business firms. So, in 2007, they packed up their web design business and shifted their entire focus to email service. So, what made it such a huge success?

Valuing What Your Customer Needs

Even when the company was fully focused on providing email marketing service to its clients, they faced a host of larger and better funded competitors, including Constant Contact.

What kept MailChimp retain its clients?

It was the trust their customers had placed in them. Chestnut said that it was their close connection with the customers that their rivals didn’t have. They knew what their customers wanted. They offered affordable services, which also allowed greater customization to cater the customers’ needs.
Learning to Make Money is More Rewarding than Spending it as a Startup

Co-founder of Basecamp, Jason Fried, said that you learn bad habits from raising money, for example, if you have some cash in your bank account, it makes you good at spending it. But on the other hand, if you have to earn it yourself, it makes you good at making it, which is a good habit for an entrepreneur to learn sooner than later in running a business so as to survive without relying on other people’s money. For MailChimp, learning to make money instead of spending it were just the essentials to keep their business running.
Understanding A Small Business is the Key

Although, MailChimp was approached by many potential investors from time to time, but Chestnut says that every time they had rendezvoused with investors, they failed to understand the gist of small business. They wanted to see the company at an enterprise level with a large number of employees
Chestnut further said that they were often told that they were sitting on a gold mine, but something about this idea never felt right to them. For the founders of MailChimp, it was all about proving to small businesses that they can do it just like Chestnut and Kurzius made it happen. Being a small business itself, this mail service company could understand the requirements of other small businesses fairly well. Despite the high level of uncertainty that persists in the tech-world, both of them feel that the company will run better if they control it rather than the outside investor.

Therefore, a startup doesn’t always have to let venture capitalists control them by fueling their ideas with a large amount of debt. Instead, they can be the pirate of their own ship and sail it through highs and lows the way they desire.

How to Invest Smarter?

Angel investors and venture capitalists provide funds to early stage or emerging startups in exchange for equity and aiming to make huge profits. The trend of such investments has been increasing and there are a number of startups that became successful as a result of such investments, including WhatsApp, Uber, and Facebook.

It is very important to invest in a promising startup that has a potential to attain a unicorn status, yet, it is not easy to be an investor. Choosing the right start up is as important for an angel investor as it is for an entrepreneur, but does it determine an investor’s success? To understand how one can invest smarter, let’s look at a few tips by different investors.

Focus on Team and Market

The investor in Famo.us, TouchOfModern, and Airseed, Siqi Chen, said that when you make an investment in a startup, it is usually a very early product. Therefore, it is crucial for an investor to calculate and assess the opportunities accordingly and should keep the focus on the team and the overall market.

Ask Yourself – “Would I Join this Start-up?”

Another angel investor, Mike Greenfield, who invested in Hullabalu and Pocket shared some important insights on taking an investment decision. He said that in the beginning, he used to ask himself if the startup would yield a positive outcome on an investment, but it changed over time, and now he usually asks if he could see himself joining that company when he was 24? If the answer to the latter is affirmative, it shows that the founder of a particular start-up is working a problem that isn’t structurally flawed and has a good chance of winning big.

He further said that such companies have a potential to convince a geeky person like him as they work on something that is important and also ace the integrity test. He added that if a startup satisfies all those things, it makes him feel like he’s doing something right as an investor, regardless of whether he makes money out of it or not.

Read the Herd Correctly

There is this common phenomenon in a stock market, whereby, investors can make a lot of money simply by reading the herd correctly. The same was observed by Christopher Schroeder, investor in Vox Media and Skift, when he began angel investing a few years ago. He said that when he presented a deal to bright and successful friends, the first question they asked was “who is in?” even before the question about a team and its concept popped up. Therefore, one has to read his herd correctly before taking any decision.

Identify the Scale of Assistance Required by a Startup

Jeff Miller, another investor in the world of angel investing, said that when an angel provides a feedback on a product, founder usually appreciate it. But the clutch actions are quite rare than anticipated by him. Such actions can affect a company’s future. However, if you look at it from the perspective of successful companies, they look for a minimal assistance from their investors. So, it is important to identify the scale of assistance required by a startup for its future growth.

Choose a Company with a Good Working Product

It is of vital importance to invest in a company that has a good working product. Having a good team of individuals in any startup is not enough if they don’t have a product that solves a problem. A product has to show a “product-market fit.”

Double Down the Investment Once a Potential Unicorn is Spotted

Once you identify a potential winner, you should “double down”, as it represents almost 20 percent of the initial pool of investment.

However, patience is the key, and individuals in early stage startups usually have to wait for 3 to 10 years before they start earning profits from their investment.

Although, there is a lot of risks involved in investing in a new startup, yet the trend for angel investing is rapidly increasing. In order to invest smarter, an investor has to always welcome different ideas, because great ideas are born every day.

But only a few of them, with the right investor (and investment) turns out to be a complete success.

Women & Angel Investing

Angel investing is a known term in the world of investments. Startups and early stage companies in need of funds usually try to approach these angels who make investments in exchange for stocks of the company. A number of popular names, such as WhatsApp, Uber, and Facebook have encouraged the angel investors to come forward and invest in startups with an aim of making huge returns.

The Shift in Focus Toward Female Entrepreneurs?

So, what do angel investors really look for? It is mostly the commitment, quality, integrity, and passion of the brains behind those startups that these investors care about. Last year, an angel investor and CEO of photo editing software PicMonkey, Jonathan Sposato, made an announcement that he’ll only invest in startups that have one or more female founders in it. He said that female entrepreneurs face a tough time getting traction, whether it’s about raising money, sharing their ideas, or even recruiting. He further said that you cannot just ignore these issues; you have to act as a catalyst if you are passionate about it. Sposato was of the opinion that this problem arises, because investors tend to back those startups that are similar to other successful firms they funded before, and most of those companies are led by men.

Male Entrepreneurs Securing More Investments

According to a recent research by the Women’s Business Council and Deloitte, it was identified that the proportion of women entrepreneur fell in 2014 despite a large number of registrations by new companies. Lack of female angel investors is also a contributing factor as most of the angel investments are still controlled by men. In a study of 220 UK startups by Startup DNA, it was revealed that male founders are 59 percent more likely to secure investments than females.

Angel Investing – Tides are Changing

However, the tides are changing. In a report issued by the UK Business Angels Association and the Center for Entrepreneurs, women now represent one in seven angel investors in the UK, which is twice as much as it was observed in 2008. Similarly, in the U.S., the number of female investors has increased from 20,000 in 2005 to around 60,000 in 2014.

More opportunities are being created for women and its source is the ever growing awareness among angel investors about the fact that startups with female founders are good investments. Moreover, women are also becoming aware of their potential to be a successful entrepreneur, whereby, they no more have to clean other people’s mess and can instead focus on materializing their own goals. Jeffery E. Sohl, director of the Center for Venture Research, said that while a percentage is still low, a large number of women-led organizations are getting angel funds. He is hopeful that this trend will continue to grow, as more women are getting degrees in engineering, technology, and science.

A senior fellow at the Kauffman Foundation and Founder of Next Wave Ventures, Alicia Robb, gave credit to the women entrepreneur role models who are paving a way for other women and showing how they overcame the obstacles despite the challenges. In 2015, 29 percent of the entrepreneurs, who sought funding, were women and 24 percent of the angel backed companies had female founders. According to a report by the BMO Wealth Institute, 51 percent of the personal wealth, U$S 14 trillion, in the United States are currently controlled by women and the amount is expected to rise up to $22 trillion by 2020.

Although, angel investing has always been dominated by male investors, the media has begun to play its part. For example, TV shows, such as Shark Tank, are familiarizing women with angel investing. Robb also said that angel groups have put in a lot of effort to reach and engage women. One example is Astia and Golden Seeds. They are focused on connecting investors to invest in startups with female founders. During the last five years, different organizations, including Pipeline Angels, 37 Angels and Female Funders have also joined them, and it has expanded from 21 cities in 2015 to 33 cities in 2016.