I never realized how much strategy goes into angel investing until I began reading Winning Angels by David Amis and Howard Stevenson. Obviously, you have to have enough money to be able to contribute to the growth of a start-up company, but I never really thought about how much money do you need to have. This book does a good job of highlighting things to consider when trying to figure out how much capital one has and how much of that capital should be used for investing. Some of the big things to consider include your family, living expenses, and current/future income. Once you know the details of those, then you can start to think about how much of your net worth are you ok with investing with the expectation that you most likely will lose it all and still be able to support yourself and your family. I think this mindset can help entrepreneurs as well when deciding whether or not to start a business and when big financial decisions come into play.
The authors of the book also emphasize the importance of networking when it comes to sourcing potential deals. Sourcing is defined by the authors of Winning Angels as “identifying entrepreneurial projects of merit.” I found it fascinating to read about why it is important to try to invest in multiple start-ups if possible. You would think a conservative approach would involve doing one investment at a time and seeing what happens. However, the authors make the great point that most of these start-ups have a low percentage of providing big return on investment. You increase your chances of success by investing in multiple opportunities with the hopes that one or two of say 20-25 businesses strike gold. Since it is important to find a handful of viable deals to invest in, networking becomes vital for connecting angels to entrepreneurs. Building relationships within the investing world is how you can generate a constant flow of referrals of entrepreneurs looking for investors and building a reputation as a successful and supportive investor is how you increase your chances of entrepreneurs striking deals with you.
I want to end this post by emphasizing the importance of the investor-entrepreneur relationship. I think it is important for both parties to do their research into the other before striking a deal. Going into business with someone you don’t trust or that doesn’t seem to have a similar vision for the future as you is not the way to go even if they have the money you need. Both parties will ultimately lose in that situation. Networking provides a filter to this process if you will. It allows strong entrepreneurs to be referred to like-minded angel investors and vice versa via a trustworthy third party. So moral of the story is, as an investor or an entrepreneur, continue to learn, research, and meet as many people as you can so that everyone can have an increased chance of achieving success.