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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
A practical roadmap to achieve annual returns of 25% or more with a well-designed angel portfolio
Angel Investing is a comprehensive, entertaining guide that walks readers through every step of the way to becoming a successful angel investor. From building your reputation as a smart investor, to negotiating fair deals, to adding value to your portfolio companies and helping them implement smart exit strategies, this book provides both the fundamental strategies and the specific tools you need to take full advantage of this rapidly growing asset class.
Written by David S. Rose, the founder of Gust, the global platform that powers the world of organized professional angel investing, this revised and updated edition delivers insights on:
- Why everyone with six figures to invest should consider angel investing, plus the non-financial rewards of angel investing
- How to source and identify high-potential opportunities, and build your angelic reputation so that the best deals come to you
- The impact of AI and advancing technology on angel investing and why you absolutely must completely understand the concept of exponential growth
- The impact of crowdfunding, syndicates, and the global revolution on angel investing
- Major angel investing blogs, groups, and courses to explore
The fully revised and updated edtion of Angel Investing is an essential read for all investors seeking to establish a long-term view and approach to angel investing as a serious part of an alternative asset portfolio while also enjoying being an integral part of exciting new ventures.
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Seitenzahl: 445
Veröffentlichungsjahr: 2025
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Table of Contents
Cover
Table of Contents
Title Page
Copyright
Foreword
Introduction: How I Became an Angel Investor
PART I: The Basics of Angel Investing
1 The 25 Percent Annual Return
Can You Really Make 25 Percent a Year?
Who
Can
Be an Angel?
… And Who
Should
Be an Angel?
Getting Started in Angel Investing
Types of Angel Investors
2 Plus, It's Really Fun
Keeping Up with the World
Entrepreneurship Without the Responsibility
The Joy of Giving Back
The Social Side of Angel Investing
Note
3 Risks and Returns
The Risk-Return Trade-Off
Other Risks in Angel Investing
4 The Financial Life of a Startup
Stage 1: The Entrepreneur's Own Money Is the First Cash in the Business
Stage 2: The First Outside Capital Has Traditionally Been Raised from the Four Fs: Friends, Family, Fans, and Fools
Stage 3: The Entrepreneur Begins Fundraising
Stage 4: The Entrepreneur Should Consider Applying to a Startup Accelerator
Stage 5: Enter the Angels, Either Independently or in Groups
Stage 6: Venture Capital and the “Series A Crunch”
Stage 7: Growth Capital and the Letters Beyond B
Stage 8: The Public or Private Exit
PART I: Economics, Portfolios, and Your Personal Thesis
5 The Secret Economics of the Angels
The Four Simple Numbers: Basics of Investment Math
How Much Should You Invest?
What Target Rate of Return Should You Aim For?
What Is the Company Worth When You Invest?
How Do Initial Valuations Affect an Angel's Ultimate IRR?
Changing Valuations During a Round
Notes
6 The Portfolio Theory of Angel Investing
Truth 1: Most Startups Fail
Truth 2: No One Knows Which Startups Are
Not
Going to Fail
Truth 3: Investing in Startups Is a Numbers Game
Truth 4: What Ends Up Usually Went Down First
Truth 5: All Companies Need More Money … Always
Truth 6: If You Understand and Follow Truths 1–5, Angel Investing Can Be Very Lucrative
Note
7 Developing Your Personal Investing Thesis
Investors Have a Thesis
Founders Have a Company
Is There a Match?
Start Building Your Thesis with Three Basic Building Blocks
After the Basics Come Your Specific Factors
Thinking About Your Portfolio as a Whole
8 Impact Investing
The Spectrum of Impact Investing
Impact Investing in Action
Note
PART III: Deal Flow, Selection, and Due Diligence
9 Generating Your Deal Flow
Personal Connections
Angel Groups
Meetups
Pitch Competitions
Startup Conferences and Launch Events
Accelerator Demo Days
Online Deal Sources
Deal Brokers
What to Expect When You Meet a Founder
10 Building Your Angelic Reputation
Create Your Profile
Write a Blog
Answer Questions Online
Attend Events in Your Local Startup Community
Participate as a Judge, Mentor, or Panelist
Pay It Forward by Advising Startups
11 Bet the Jockey, Not the Horse
What Makes a Great Entrepreneur?
Are Startups a Young Person's Game? How Young?
Serial Entrepreneurs Versus First-Timers
What About Tech Savvy?
And What About Education?
Warning Signs of a Weak Founder
12 Catching the Pitch
Strength of the Management Team
Size of the Opportunity
Product or Service
Other Issues
Where Is My Money Going?
Materials You Should Expect to See During the Pitch Process
Summary Financials
13 Look Under the Hood and Lead a Deal
Due Diligence
Leading a Deal
Notes
PART IV: Deal Structuring and Negotiation
14 Investment Forms and Their Functions
How Equity Investments Work
The Discounted Convertible Note
Fine Points of Investing in SAFEs and Discounted Convertible Notes
15 The Art of the Angel Deal
Integrity and Knowledge
Relative Power Position and Personal Style
The Question of Control
Red Flags in Deal Negotiation
Note
16 Term Sheets and Closing
Term Sheet for Convertible Notes
Term Sheet for SAFEs
Term Sheet for Convertible Preferred Stock
17 Joining an Angel Group
How Angel Groups Operate
How Smart Entrepreneurs Work with Angel Groups
Angel Group Money Matters
The Future of Angel Groups
PART V: Post Investment: Adding Value and Exiting
18 After the Investment
Monitoring Your Company
Portfolio Conflicts
Making Follow-On Investments
19 One Plus One Is Three
The Three Ws
Basic Expectations for Angels
Serving on a Company Board
20 The Impact of AI and Advancing Technology
The Exponential Power Curve
The Exponential Organization
Notes
21 Exits and Other Unicorns
When a Company Fails
When a Company Is Acquired
PART VI: Other Ways to Be an Angel
22 Crowdfunding, Syndicates, and the Global Revolution
But Wait, Along Came Equity Crowdfunding!
So What Did the Availability of Equity Crowdfunding Do to Angel Investing?
Angel Syndicates for Accredited Investors
Note
23 Sit Back and Let Someone Else Do the Work
Note
24 The Entrepreneurship Financing Ecosystem
Government Grants
Economic Development Agencies
Business Pitch Competitions
Accelerators
Startup Studios
Intermediaries
Super Angel Investors
Venture Debt Lenders
Private Equity
Growth Equity
Corporate Venture Groups
Notes
25 The Gust Online Platform for Angel Investing
The Gust Angel Collective
The Gust Investor Dashboard
The Industry's Integrated Platform
Understanding and Using the Company Profiles on Gust
Glossary
Acknowledgments
About the Author
Index
End User License Agreement
List of Tables
Chapter 5
Table 5.1 Comparing the Target Company to Similar Deals.
Chapter 21
Table 21.1 Exit Scenario Frequency.
List of Illustrations
Chapter 1
Figure 1.1 Ideas versus execution.
Chapter 3
Figure 3.2 Comparative asset class risks-return trade-off.
Chapter 6
Figure 6.1 Probability of angel returns based on portfolio size.
Figure 6.2 The J curve graph for a startup investment portfolio.
Chapter 8
Figure 8.1 Impac investing and the business-philanthropic spectrum.
Figure 8.2 Priorities in impact investing.
Chapter 12
Figure 12.1 TAM, SAM, and SOM.
Chapter 20
Figure 20.1 The exponential power curve.
Chapter 21
Figure 21.1 Payout waterfall for a company with six equity classes.
Chapter 24
Figure 24.1 The entrepreneurial finance ecosystem.
Guide
Cover
Table of Contents
Title Page
Copyright
Foreword
Introduction: How I Became an Angel Investor
Begin Reading
Glossary
Acknowledgments
About the Author
Index
End User License Agreement
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Praise for Angel Investing
“David S. Rose's Angel Investing is the best book on early stage investing ever written. His method of step-by-step explanation is better than any I have read in 20+ years of professional angel investing. I will recommend this to every serious entrepreneur seeking investment as required reading before the effort.”
—Dave BerkusChairman emeritus, Tech Coast Angels, and author of Berkonomics
“Only an angel who has backed over 90 startups could possess the mastery to provide such illumination into our craft. David's candor and insights will attract more investors to this entertaining and lucrative activity so essential to economic growth.”
—John HustonChair emeritus, Angel Capital Association
“David S. Rose is one part iconic investor, one part eccentric entrepreneur, and one part stand-up comic. Angel Investing is required reading for anyone who is thinking about becoming an angel, or raising money from them. David answers all the questions that everyone is afraid to admit that they don't really get … in simple, straightforward, and downright delightful prose. The result is an oxymoron: an entertaining textbook that is actually understandable and jam-packed with information you can really use.”
—Patty MeagherFounder, Stamford Innovation Center
“Angel Investing is an engaging, easy read, full of real stories and hard numbers, actual cases, and a whole lot of good advice. David S. Rose brings tons of real-world knowledge to the subject that makes this required reading for every new angel.”
—Tim BerryAuthor of Business Plan Pro, entrepreneur, angel investor
“Anyone with a checkbook can be an angel investor, but it takes insight to do it well. David S. Rose has written a terrific new book that will help would-be angels make money, rather than lose it. From explaining the value of diversification, to tips on evaluating deals, to offering up plans to attract good deals, Angel Investing will help you move from a money-losing amateur to a money-making professional angel. And if you're an entrepreneur looking for angel money, you should read this book, too. It will help you understand what knowledgeable angels are seeking and how they will evaluate you.”
—Scott ShaneAuthor of Fool's Gold? The Truth Behind Angel Investing in America
“David S. Rose is one of the most insightful thinkers about the angel and venture investment markets. It's rare that an investment leader with so much experience and success takes the time to share (systematically!) his knowledge so openly. Whether you are new to angel investing or someone with lots of experience, you will learn a ton from reading this book.”
—Marc BodnickCofounder, Elevation Partners
“The future of financial markets will be based on the democratization of capital, as the funding of innovation is no longer limited to large institutions and venture capitalists. Angel Investing is the definitive guidebook for visionary investors seeking to profit from the startups of today that will become the superstars of tomorrow. David S. Rose is both a brilliant futurist and an engaging, accessible writer, and his book reveals the secrets behind investing at the leading edge of technologies and markets.”
—Faith PopcornFuturist, CEO, and author of The Popcorn Report
“What a delightful read! Not only is this book a must-read for angel investors, it is also a must-read for all early-stage founders.”
—Jilliene HelmanFounder and CEO, Realty Mogul
“Superb! Angel Investing by David S. Rose is without a doubt one of the best books I have read on the subject of angel investing, venture capital, and entrepreneurship. It is easy to read and completely captivating—David's real-world experience is compelling. He shows first-hand how to take the casual sport of angel investing to a whole new level, and make a real business out of it. There is a world of difference between managing a single investment and managing a whole angel portfolio. This unique book addresses everything from the step-by-step process of due diligence, to negotiating win/win deals, to managing the most intangible—but most important—part of angel investing: your reputation. From every perspective, this is the book that every prospective angel should read before writing their first check.”
—David FreschmanManaging principal, Innovation Ventures; CEO, Early Stage East; founding member, ARC Angel Fund
“As David S. Rose points out, angel investing can be ‘as much fun as it is possible to have with your clothes on.’ But it isn't for the faint of heart. Rose's terrific book provides a sweeping guide for anyone interested in mastering the art of funding startups.”
—Jeffrey BussgangAuthor of Mastering the VC Game
NEW YORK TIMES BESTSELLER
DAVID S. ROSE
CEO OF GUST AND FOUNDER OF NEW YORK ANGELS
ANGEL INVESTING
THE GUST GUIDE TO MAKING MONEY & HAVING FUN INVESTING IN STARTUPS
Foreword by REID HOFFMAN Angel Investor and Founder of LinkedIn
Copyright © 2025 by David S. Rose. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permission.
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Trademarks: Wiley and the Wiley logo are trademarks or registered trademarks of John Wiley & Sons, Inc. and/or its affiliates in the United States and other countries and may not be used without written permission. All other trademarks are the property of their respective owners. John Wiley & Sons, Inc. is not associated with any product or vendor mentioned in this book.
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Library of Congress Cataloging-in-Publication Data is Available:
ISBN: 9781394331413 (Cloth)ISBN: 9781394331420 (ePub)ISBN: 9781394331437 (ePDF)
Cover Design: André ProvedelAuthor Photo: David Noles
Foreword
Reid Hoffman
As I’ve described in my books Impromptu and Superagency (coauthored with GPT-4 and Greg Beato, respectively), the story of humanity is the story of technology. While our official species name is Homo sapiens, a more accurate name for us is Homo techne. Humans are defined by being toolmakers and tool users. Through our technology, we become neither less human nor superhuman or post-human: we become more human.
When I ask someone to picture “technology,” they might envision a rocket soaring into space or a giant AI data center. But one of the most important technologies we’ve developed as humans doesn’t involve stainless steel or silicon chips—it’s investor capitalism.
Rather than relying on the favor of emperors or queens to finance innovation, new businesses could raise money from investors in exchange for some of the upside of success. And starting in the latter part of the 20th century, the technology of investor capitalism combined with the technology of computers to transform our world, our economy, and our daily lives.
In the past half-century, the world has come to recognize the power and impact of venture capital. Here in 2025, the world’s five most valuable companies are all American technology companies that were backed by venture capital. And yet, this relentless focus on venture capital overlooks the critical role of angel investing.
While many know me as a venture capitalist, before I joined Greylock Partners, I was an angel investor. As an angel investor, I backed iconic companies like Facebook (now Meta), Zynga, OpenAI, and over 100 more.
Becoming a successful angel investor is financially rewarding, but it is also intellectually and emotionally rewarding. When I put money into companies, I was investing for financial return but also for the joy and fulfillment of helping new innovators and innovations change the world, people like Mark Zuckerberg, Mark Pincus, and Sam Altman.
Whether during the social internet era of Web 2.0, the rise of the sharing economy, or this most recent AI revolution, angel investing has been one of the key ways I capitalized on the insights I had developed about emerging technologies and markets.
But I don’t want to give you the impression that angel investing is a good way to make a “quick score.” As David S. Rose will tell you in the book you are about to read, successful angel investors are usually the ones who take a long-term view of things. I felt as strongly as I did about the companies I invested in because I saw them as part of a technological and cultural shift that was going to play out not just over months, or even years, but rather over decades.
Picking winners on the stock market, where companies have established track records and there is a large body of information about them at hand, is hard. Picking winners when a company is little more than a couple of founders in a garage or coworking space is orders of magnitude more difficult. If you want to be a successful angel, you have to have an appetite for risk and the ability to accept failure.
More important, though, you have to be curious. And studious. You have to want to know everything you can possibly know about an emerging technology and the entrepreneur who wants to bring that technology to market.
And remember, while angel investors are an investment committee of one, investing in startups is a team sport. If you're a new angel, identify mentors, develop allies, and start building the networks of trust that will ultimately inform your dealmaking. Picking up this book is a good start. David is an experienced angel who has backed over 120 startups. He's lectured at top schools, taught TED attendees how to pitch a venture capitalist, and created Gust, the world's largest community of entrepreneurs and early-stage investors with members from 192 countries. Let your education begin!
Introduction: How I Became an Angel Investor
ONE DAY DURING my junior year in college, I received a letter from my great-uncle Dave, inviting me to join him for lunch in New York the following month. It seemed that a few of his close friends would be joining us, which was disappointing, because I enjoyed talking one-on-one with Uncle Dave. Imagine my surprise when the other three guests arrived … and it turned out that every one of them was a Nobel Laureate!
Although the intervening years have clouded my memory of exactly what we talked about that day with Rosalyn Yalow, I. I. Rabi, and Murray Gell-Mann, I recall being fascinated by how familiar my 84-year-old great-uncle was with the subjects being discussed, and how intimately these three intellectual giants conversed with their close friend. They were far from the only such luminaries who made up Great-Uncle Dave's regular circle of acquaintances.
David Rose, after whom I have the privilege of being named, was an extraordinary person. Born in Jerusalem in the 19th century, he moved to New York as a child, where he grew up in poverty on the Lower East Side, and ended his formal schooling after the ninth grade. As an industrious entrepreneur, he founded several companies with his older brother Sam (my grandfather), including the family construction and real estate development business, which is still going strong over a century later.
But the most interesting thing to me about Uncle Dave was his propensity for finding and supporting a wide range of technological innovation. It turns out that this boy from the streets, with little technical education but boundless energy and curiosity, had met with Albert Einstein, was the closest of friends with Vladimir Zworykin (inventor of the television tube), and described himself as an “innovation catalyst” decades before the term angel investor was coined. He would learn of a potentially exciting new technical development, bring it to the attention of an appropriate scientist or university, and provide the Seed funding that would enable them to research and commercialize it.
He was the primary supporter behind the development of the portable artificial kidney developed by Dr. Willem Kolff (who invented the artificial heart), the hyperbaric operating unit at Mt. Sinai Hospital, vascular stapling for rapid surgery, and the Foundation for Medical Technology, one of the leading funders of new medical instrumentation. He also personally invented through-the-wall air conditioning for high-rise residential construction.
The effects of his investments reverberate even today. To assist with the development of a novel desalination project that he cofounded in Israel in the 1960s, he hired a young graduate student named Yossi Vardi, who went on to become the youngest ever Israeli Minister of Development and today is one of the world's leading angel investors himself (with even more companies in his portfolio than I have).
The inspiration that David Rose provided to me was carried on in turn by my father, Daniel Rose, who won Ernst & Young's Entrepreneur of the Year award when he was in his 70s, and who to this day is developing new projects and new ventures in his late 90s! Their legacy has given me a unique perspective on the financing and development of entrepreneurship. While I am not alone in being a fifth-generation entrepreneur, I do believe that I may be one of the world's few third-generation angel investors.
With all of these role models in front of me, I began my own entrepreneurial career bright and early at the age of six, charging my friends five cents each to get a peek at my newborn baby brother. When I was eight, my father gave me a bound notebook so that I could write down all my inventions, and by the time I was out of elementary school, I had a graphic design business that produced marketing materials for my other brother, who performed as a magician at children's parties. In high school, I founded an in-school movie program, co-opting a maintenance man to serve as a projectionist of films that I got corporations to send me for free. By college, I was buying firewood wholesale and selling it retail and was running the school's print shop with a staff of dozens of apprentices. In the 1970s I was profiled in the college's daily newspaper as an “Entrepreneur” (their quotes, which just shows you how unfamiliar the term was back then).
After finishing my MBA in the early 1980s, I cofounded my first technology-related business with Dr. Peter Garrity, one of my business school professors. The Computer Classroom was one of the world's first corporate computer training programs, teaching executives how to use spreadsheets and word processing programs. I was also fully engaged in my day job of real estate development, but continued to start tech companies on the side. One of them developed enough traction in the nascent wireless communications space that I finally transitioned into the tech world full time.
Thanks to an amazing amount of luck, my first business managed to get funding from a top-tier venture capital fund in the early 1990s and eventually grew into a multinational, internet-based communications company with 120 people on staff. When the dot-com crash came along with the new millennium and wiped out a decade's worth of effort, my long-suffering spouse suggested that I take a vacation from entrepreneurship and get a “real” job.
So I became an angel investor.
The result is that over the past twenty-five years I have had just about as much fun as it is possible to have with your clothes on. Twenty years ago I founded New York Angels, which today is one of the most active angel groups in the world, having put more than $150 million to work across more than 500 early-stage ventures. I've personally invested in over 120 innovative companies, and had exits—some in the seven figures—based on acquisitions by companies like Amazon, Uber, Google, Facebook, Intel, CBS, Kodak, and others. Along the way I've met some of the most extraordinary entrepreneurs and investors in the business and had the opportunity to teach and mentor hundreds of others through my lectures at Yale, Harvard, Columbia, and other business schools, as well as my TED Talks on pitching to investors, which have been viewed nearly two million times. I founded the Finance, Entrepreneurship & Economics program at Singularity University, was named Mentor of the Year by New York University's Stern School of Business, “Patriarch of Silicon Alley” by Red Herring magazine, “New York's Archangel” by Forbes, and received an honorary doctorate from Stevens Institute of Technology.
After all this, my wonderful spouse finally relented and let me get back into the entrepreneurial business, which enabled me to found Gust, the online platform that today powers the global angel investing industry. Gust has been used by over a million startups in 192 countries to collaborate with more than 75,000 serious angel investors. It has been the official platform of many of the world's national angel investor federations and has tracked the investment of billions of dollars in early-stage angel and Seed investments.
These experiences on both sides of the entrepreneurial finance table have provided me with a unique, birds' eye view of the world of early-stage investing. They have made it clear that angel investing has moved from being a casual sport of the super-rich to a legitimate asset class for everyone with a level of assets or income that would qualify them as an Accredited Investor.
There is a major change sweeping through the world of business that began in the 20th century and took off in the 21st, whose full import is just beginning to sink in. Advances in technology are accelerating at a truly extraordinary rate, and the effect will be to turn upside down virtually everything that we think we know about business and finance. Every year or so, the power of technology is doubling at the same time its cost is being halved, and every year technology is being applied to an ever-increasing number of new industries. As a result, it is not an exaggeration to state that any company designed for success in the 20th century is doomed to failure in the 21st. This is a great opportunity for people who have even a moderate amount of capital to invest (usually north of $100K) and are willing and able to take prudent risks with a portion of it: angel investors!
Consider just a few examples: commercial airlines, retail booksellers, higher education, agriculture, music and entertainment, consumer electronics, even the urban taxi business. In every case, an existing industry is being completely upended by changes in technology, regulations, and/or marketplaces. More than 90 percent of today's Fortune 500 companies were not even on the list when it was first compiled in 1955. The result is that the biggest, most valuable companies of tomorrow are just being formed today, but rarely do public stock market investors manage to participate in the explosive early growth phase of their value creation.
There is, however, a way for private investors to take part, by investing in—and supporting—a company from its very beginnings. This form of investment can be extraordinarily lucrative. When Ben Silberman approached New York Angels in April 2009 seeking a small investment in his interactive mobile catalog idea, he valued his company at $2.5 million. In January 2024, just 15 years later, Pinterest was valued at over $25 billion—an increase of 1 million percent. As you can imagine, angel investors such as my friends Brian Cohen and Bill Lohse, who had the foresight (and faith) to participate in that initial funding round, have done very, very well. Compare that to public market investors who bought Facebook at the IPO price of $38. In January 2024, they would have seen a value increase of just under one thousand percent. Not bad at all … but that's a difference of 1,000 times between Seed and IPO investors.
The combination of advancing technology, changing federal regulations, rapidly dropping startup costs, and new online investment platforms means that it is now possible for any serious investor to undertake angel investing the right way, and that is what this book is all about. We will start at the very beginning and walk (We're walking through together) through the market, theory, and practice of investing directly into early-stage companies. While there's no doubt that the flip side of a high-return asset class such as startups is a high risk of losing money, by taking a careful, professional approach over the long term, the statistics show that you are likely to generate higher returns than virtually any other traditional asset class. And if you're at all like me, you may well have a great deal of fun along the way!
PART IThe Basics of Angel Investing
1The 25 Percent Annual Return: Why Everyone with Six Figures to Invest Should Consider Angel Investing
ANGEL INVESTING SINCE the new millennium has moved from an arcane, tiny backwater of the financial world to a business arena that receives coverage in mainstream newspapers and smash hit television shows such as ABC's Shark Tank and HBO's Silicon Valley. Today, any sophisticated investor with a portfolio of alternate assets should be considering direct, early-stage investments in private companies as one component of that portfolio. Why? Because multiple studies have shown that over the long run, carefully selected and managed portfolios of personal angel investments—even those without a Pinterest—produce an average annual return of over 25 percent. Compared to average annual returns of less than 2 percent from bank accounts, 5 percent from bonds, 10 percent from stocks, 13 percent from hedge funds, and even 15 percent from venture capital funds, that is an impressive, if not astounding, number.
What's even more interesting about angel investing is that, unlike sitting back and clipping coupons or just reading the stock listings in the daily paper, being involved as a part owner of an exciting startup company can be a great deal of fun. You get a ringside seat at a venture that's out to change the world, direct access to company CEOs who may be the corporate magnates of tomorrow, and often early access to the latest products and services before they become generally available. You may even have the opportunity to advise and mentor a company as it develops, pivots, and changes its business plan in response to real market experience.
This must be sounding too good to be true: outsized returns and having fun; what's not to like? Here is the sobering reality: a large majority of self-proclaimed angel investors actually lose money, rather than make anything at all! How can these two true facts be reconciled? Simple: those 25 percent−plus returns are over the long run on carefully selected and managed portfolios of angel investments. In practice, however, most people who call themselves angel investors don't carefully select or manage their investments, don't take a long-term view, and in fact don't have a clue about how to approach angel investing as a serious part of an alternative asset portfolio. You are going to be different, because you are smart enough to want to understand how to engage in angel investing as a serious part of your investment allocation.
Let's begin with the basics. What exactly is angel investing?
Angel investing is when individual people (as opposed to professionally managed investment funds, corporations, governments, or other institutions) invest their personal capital in an early-stage company—often known as a startup. Angel investors, then, are individuals who invest their own money, typically in small amounts and typically very early in the life cycle of a company.
Angels find investment opportunities through referrals from people they know (such as CEOs of companies in which they've already invested), through attending regional or national events at which early-stage companies launch their products, by being approached directly by ambitious entrepreneurs, through joining with other angel investors in organized angel groups, or, increasingly, by participating in reputable online early-stage investment platforms or syndicates. All of these techniques for identifying angel investment opportunities, and many others, will be described in much more detail in later chapters.
The fact that angel investors use their money to back companies they hope will grow and bring them significant profit is not, in itself, unusual. Most mainstream investors do the same thing. They invest in blue-chip companies like Apple, Microsoft, Procter & Gamble, and JPMorgan Chase, or in mutual funds that support an array of companies, hoping their money will grow as these businesses do. The crucial difference between these mainstream investors and angel investors is the fact that angels invest in startups—companies that are relatively new, relatively small, and are privately held (rather than publicly traded in a marketplace like the New York Stock Exchange or NASDAQ). Because these companies are like tiny plants, striving to one day become giant trees, the very first investments in them by angels and others are often referred to as Seed investments.
Unlike public companies, startups are usually little known. They generally don't appear on the cover of BusinessWeek or Fortune, and you won't hear them talked about by stock analysts on cable TV or even by your favorite broker. Understanding what these startup businesses are like, where to find them, and how to identify those with significant growth potential is one of the keys to being a successful angel investor.
The world of startups and the ways in which angels and startups work together is a fascinating topic—and one in which change is constant. The stage at which an angel would typically begin supporting a startup with a cash investment has been changing since the early 2010s as a direct result of the decreasing costs of starting up a scalable company using current technologies. In the past, when the only way to get a company going was by spending cash, early investors would often have no alternative to “taking a flyer” and supporting an entrepreneur who had only a vision and a plan.
These days, with technology providing startup business with virtually free hosting, bandwidth, tools and marketing (or at least “free enough to get you started”), the bar for a company to be considered fundable has been raised quite a bit, because it is so easy for anyone to get started. Since the large majority of opportunities with which angel investors are presented already have something going for them (a finished product, initial customers or users, perhaps even revenue), it makes it extremely challenging for entrepreneurs with only an idea. Why should angels take the added execution risk if they don't have to? Derek Sivers, an entrepreneur, writer and frequent speaker at the TED conferences, neatly summed up the idea versus execution relationship in a seminal blog post from which I've borrowed this eye-opening chart (Figure 1.1).
Figure 1.1Ideas versus execution.
Source: sivers.org/Derek Sivers
Many companies in their earliest stages are unable to attract financing from angels and other professional investors. Consequently, so-called Friends and Family rounds of investment are the most common way (other than the founder's own capital) of funding a startup, accounting for nearly a third of all financings. (I'll explain the various stages of financing a startup in more detail in Chapter 4, “The Financial Life of a Startup.”) Friends and Family investors are not basing their investment on the merits of the business, but rather on their support for the entrepreneur personally. By contrast, the true angel investor focuses on the long-term strengths and prospects of the business, in much the same way a mainstream investor picks stocks based on an evaluation of the strengths and prospects of the companies issuing those stocks.
As with investors in public company stocks, angels are part owners of the companies in which they invest. The difference is that $10,000 invested in Apple might buy you 40 shares of stock, representing one 375 millionth of the company. That same $10,000 invested in a promising startup might buy you 10,000 shares of stock, representing a full 1 percent of the company's ownership.
With that low a cost of entry, it would be fair to ask if one angel ever becomes the majority owner of a startup. The short answer is “virtually never.” While there are, indeed, individuals who have put $1 million or more into one company, the vast majority of serious angel investors play at much smaller numbers. This is because investing at the Seed and early stages of a company's life cycle is incredibly risky, with the large majority of all such investments failing completely. The corollary is that angels therefore try to invest into between 20 and 80 companies, thereby limiting the amount that will be lost on any one in particular.
Here are some specific numbers: the average individual angel puts in about $25,000 per company, typically with 10 or 20 angels joining together to make up the investment round. (As we'll explore in detail, many angels participate in angel groups or syndicates of various kinds. It's a very effective way to pool insights, ideas, connections, and other resources, enabling angels to invest far more powerfully than they'd be able to do as lone individuals.) A recent survey showed that the average total round size for a large angel group was between $500K and $1 million … although increasingly groups are joining together to syndicate deals in order to raise even larger rounds.
Outside of that context, the range is very wide, with individual, solo angels investing anywhere from $5,000 to $500K (or more) in a given company. “Super angels,” which is the misnomer usually applied to experienced investors who manage micro-venture funds, seem to be averaging about $100K–$250K per investment. It is only when you get into the territory in which venture capital companies operate that you'll find early-stage investments going over $1 million from a single source.
In a nutshell, an angel investor is a private individual who invests significant but modest sums, usually in five figures, in each of a variety of startup businesses. These investments collectively form a portfolio that, over time, will almost certainly include both winners and losers. The key to being a successful angel, of course, is to have enough winners to offset the losers—and then some.
Can You Really Make 25 Percent a Year?
The essence of successful angel investing begins with recognizing and accepting one hard fact about investing in startups: your chance of making a profit by investing in startups is somewhere between very, very slim and almost negligible if you're talking about investing a very small amount into one company. But those odds increase significantly once you begin diversifying your investments (even if they are relatively small) into dozens of companies.
Why is this the case? It is because a majority of all new, angel-backed companies fail completely, so if you invest in only one company, the odds are that you will lose all your money, not just “not make a profit”. When a company succeeds, it has the chance to really succeed, return many times the initial investment. This is known as a “hits” business.
So how well does the average angel investor do?
Unfortunately, the data needed to answer this question doesn't really exist (no matter what anyone tells you). Period. The reasons are: (1) there is no such thing as an “average” angel investor, and (2) there is currently no way to track the activities or record of individual investors, even those within well-documented groups.
That said, my best guesstimate of the key statistics describing the activities of a typical angel investor would be as follows:
Individual angel investors receive anywhere from 0 to 50 in-bound pitches a month,
depending on how actively they promote their availability and how accessible they make themselves (although many more can be accessed online and elsewhere if one proactively goes looking for them).
Organized angel investment groups might typically receive between 5 and 200 submissions monthly
. All angel groups taken together probably receive about 10,000 unique submissions monthly. All individual angels taken together probably receive about 50,000 unique funding requests each month.
Organized angel groups typically look at about 40 companies for each one in which they invest
(compared to 400 for venture capital firms).
And of all requests for funding received by an angel group each year …
30 percent may be invited for a preliminary screening review.
10 percent are invited to pitch to the full group.
2 percent receive funding from at least some members of the group.
On average, individual investors in US angel groups invest about $35,000 per angel per company, and members of a group taken together invest about $500K per company.
Once an investment is made, the very rough outcomes (averaged from several independent studies of angel returns) are as follows:
50 percent eventually fail completely.
20 percent eventually return the original investment.
20 percent return a profit of two to three times the investment.
9 percent return a profit of 10 times the investment.
1 percent return a profit of more than 20 times the investment.
Where do these numbers—assuming they are approximately accurate—leave our mythical “average” angel investor?
The reality is that results in angel investing tend to bifurcate.
The large majority of self-described “angel investors,” both in the United States and internationally, are either new to the field, not taking it seriously as a financial business, not in it for the long haul, or not willing to continue investing until they have a fully diversified investment portfolio. For those people, returns tend to be flat to mostly negative.
By contrast, “professional” angel investors, who follow the approach described in this book, are investing calmly, steadily, relatively rationally, over a long period of time and with a strong knowledge of both investment math and early-stage realities. They tend to not only make money but also do quite well; in fact, the average return for a comprehensive, well-managed angel portfolio is between 25 percent and 30 percent Internal Rate of Return (IRR) over the long haul.
There is much more to be said about how the economics of angel investing work—and how you can manage yourself and your portfolio to make them work on your behalf. We'll delve into those details in Chapter 6, “The Portfolio Theory of Angel Investing.”
Who Can Be an Angel?
Angel investing is—as we have seen—very risky (even if you take the approach described in this book and invest rationally and consistently in 20–80 companies over a long period of time), so until 2014 only a limited group of people were allowed access to this asset class. According to the regulations of the US Securities and Exchange Commission (SEC), in order to protect small investors from unrealistic, high-powered sales pitches, angel investments in the United States have historically been available only to those people who qualify under the SEC's definitions of an Accredited Investor or Qualified Purchaser. (Actually, the restriction is not on the activity of the investor, but rather on that of the company selling the ownership shares, but the impact is much the same.) Similar rules exist in many other countries that have active financial markets.
In the United States, the definition of both an Accredited Investor and a Qualified Purchaser is specifically set out by the SEC. While there is a lot of legalese surrounding both definitions, for all practical purposes you can think of it like this:
An Accredited Investor is a person who has a steady annual income of at least $200K individually (or $300K together with a spouse), or else net assets
(not
including the value of one's primary residence) of at least $1 million, or else has passed the basic stockbroker qualifying exams of the SEC.
A Qualified Purchaser is a person who has at least $5 million in investable assets themselves, or else manages at least $25 million for other people.
Throughout this book, we'll be referring back to this definition of Accredited Investor, which is the class into which practically all traditional angel investors have fallen.
… And Who Should Be an Angel?
Because angel investing should be only one small part of well-balanced portfolio, most angels do not (and should not!) invest more than 10 percent of their assets into such ventures. Therefore, in the United States, it is probably fair to say that a typical serious angel investor has invested in between 5 and 10 companies, in amounts ranging from $25,000 to $50,000 each. Of course there are individuals who regularly make much larger investments, and there are many more who invest smaller amounts. There are very, very few “professional” angel investors who see this as a full-time occupation, as opposed to venture capitalists, who are, by definition, professionals. (We'll explain more about venture capitalists and how they resemble—and differ from—angels in Chapter 23, “Sit Back and Let Someone Else Do the Work.”)
Who are these angels, and what drives them?
Angel investors have always been financially motivated (investment by definition implies the expectation of economic returns), although there is often a healthy overlay of social giveback in their calculations. Many active angel investors are, or were, entrepreneurs, which is where they first made the money that they can now invest. Thus, they are often strong believers in the ethos of entrepreneurship, excited by the prospect of supporting small companies that they believe may one day transform some segment of the business world, spurring economic growth to the benefit of millions. Angels like Reid Hoffman of LinkedIn, Peter Thiel of PayPal, Yossi Vardi of ICQ, or Esther Dyson of EDventure are quite literally changing the world around them.
However, angel investors by definition are not philanthropists or “do-gooders” in this area of their lives. Most angels I know are increasingly professional and serious about the economic aspects of the business, driven primarily by the prospect of strong financial returns over the long term.
Angel investing is one of those areas in which the so-called Law of Large Numbers applies. This is a theorem that describes the result of performing the same experiment a large number of times. According to the law, the average of the results obtained from a large number of trials should be close to the expected value and will tend to become closer as more trials are performed.
The implication of the Law of Large Numbers for angel investing is that any one specific investment is almost by definition going to be completely unpredictable and, according to statistics, likely to be an economic disappointment … but if you invest consistently, intelligently, and over a long period of time, the results are demonstrably repeatable and can be quite lucrative.
This means that in order to be a successful angel (and, more important, to enjoy being an angel), it is imperative that you have the following personal characteristics:
Long-term view (measured in at least years, if not decades)
Strong economic base and the ability to tolerate losses
High tolerance for risk
High tolerance for failure
Even temperament
Strong people skills (to deal with Type A entrepreneurs)
Self-discipline
Willingness to learn
General love and respect for entrepreneurs and startups
There are other characteristics that come into play if you are considering being an active angel, one who spends time working with the company on its operations or strategy, and/or helping the company raise its financing. These additional attributes include teaching/mentoring ability, domain expertise, business experience, financial savvy, personal networks, the ability to suffer fools gladly, and other personal traits that I find myself employing with great frequency. The previous bullet list generally applies to any prospective angel investor, whether active or passive.
As you may be sensing, being an angel investor has a lot in common with being an entrepreneur—and entrepreneurship is inherently a crazy-making business. By making a personal angel investment into one of these by-definition-crazy people, you, as the angel, have now voluntarily entered into their Alice in Wonderland world of roller coaster ups and downs, with all of the appurtenant “thrill of victory and agony of defeat.”
After all the angel investments I have made myself, I can just about guarantee that you are going to experience every disaster, disappointment, and insane improbability you could imagine … and then some. As crazy as each entrepreneur is, you're simultaneously doing this a dozen or more times! And the nature of the business is that the crazy, disappointing, aggravating, unpleasant, and economically disastrous outcome is going to be the default case for 50–90 percent of your investments!
If you are the kind of person who is going to get upset when you lose 100 percent of your $50,000 investment in a promising startup, or can't deal with the fact that the day after your founder launches a breakthrough product, Google unveils a better, free version that soaks up the entire market, then angel investing is not the business for you to be in … just as you clearly should not be an entrepreneur yourself.
Don't for a moment assume that the warning I've just offered is purely pro forma, or that anything I'm saying does not apply to me—in spades. Yes, I have been successful as an angel. And yes, I have experienced my share of failures, mistakes, and heartaches. It comes with the territory. Like every experienced angel, I have many stories to tell about sure-fire winners that went down in flames, as well as my “anti-portfolio”: opportunities I passed on that turned into major hits.
