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.

4 thoughts on “Angel Investing: Sourcing

  1. Hi Zach,

    Great post and very insightful. I completely agree with you on that last point. I think as an entrepreneur, I would probably typically jump in “feet first” if someone offered me a large sum of money to invest, so it would be very important to research the investor well in order to avoid any misunderstandings or failures. The aspect of networking is so important, as it will give both parties an opportunity to vet the candidates for those positions. Founding projects of merit is only one part of the equation. Finding investors who are trustworthy and have a vision in line with what you are doing is equally important.

    Cheers,

    Taylor

  2. Victoria Price says:

    Zach,

    I really enjoyed your post, you were very insightful into a lot of the points raised. I also thought that being conservative with investing numbers would have been the smart move rather than investing into so many in the hopes of one doing very well for the greater return. I also agree that networking is one of the biggest, most important parts of starting a business and even going through life in general. Building human capital is crucial to success when starting a venture, as is researching those you are making potential partnerships with so someone doesn’t make a decision that could later be harmful to their business.

    Great read,
    Victoria Price

  3. Hey Zach,

    My two biggest takeaways from the sourcing chapters were from an angel investor standpoint, to focus on one or two industries, and to build a trustworthy network within the industries that interest you the most. These strategies will help investors and entrepreneurs save time and, as you said, filter through other opportunities that could be bad opportunities.

    Another benefit mentioned from networking was referrals, which in many cases are like gold because, more than likely, a referral is coming from someone you know is successful and trustworthy.

    I enjoyed your reflection and looked forward to reading some more!

    Best,

    Stokes Warren

  4. Zach:

    I also found the exercises at the beginning of the book insightful. I quickly came to realize that right now; I am not a good candidate for angel investing. Maybe one day that will change! I also agree with your comments on the importance of networking. Networking can benefit you no matter what you do in life. I’ve found that it can be uncomfortable at first but gets easier the more effort one puts into it. Angel investors and entrepreneurs would do well in taking the time to build a strong network.

    adam

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