Originally published on my friend Joe Wallin's blog the startup law blog. I highly recommend you become a regular reader.
As the President of Seattle Angel, I’ve worked with a fair number of new angel investors over the years. I continually found that investors were exploring a personal interest and an investment return when they approached angel investing. This is a little different than a pure financial investor as a pure financial investor isn’t necessarily interested in being a part of changing the world through their investments. An angel investor, by nature of the outsized return their after is investing to change the world as well as earn a return. I wondered how best to help new investors direct their passion in a way that also provided a return and found there wasn’t a good set of angel investing models, so I went about interviewing as many of the best angel investors I could find to see what I’d learn and write a book on my findings.
I’ve now interviewed over 50 angel investors including a few of the top 1% of angel investors as reported by CB Insights. The list is pretty exclusive and unique including early investors in Uber, PayPal, Google, Invisalign, ZipCar, some Seattle stars like Dan Rosen, Mike Crill, Andy Liu, and Chris Devore, and some of the best investors from all over the country such as Brad Feld, Allan May, David Tisch, and Christopher Mirabile. It has been an incredible experience to interview early stage luminaries like these and get to know a little bit about what makes them tick. I’ve also written a book STARTUP WEALTH: How the Best Angel Investors Make Money in Startups for investors, entrepreneurs, and anyone interested in startups and investing can learn from.
I didn’t approach the project with a result in mind, I wasn’t looking for an answer, I was looking for more of a deeper understanding. I’d met so many brilliant investors over the years, but there was a clear difference to how the most elite investors were functioning and how everyone else approached angel investing. It never seemed like a better understanding of term sheets, although if you read all the luminaries blogs you’d think that investing was purely about the terms of the deal. Granted they’re important, but different terms are important to different people in different situations. The overwhelming consensus I learned was that investors need to know themselves and what they’re unique investment edge is before an investor can truly decide which terms mean the most for them as an investor.
Mark Suster put it perfectly in this excerpt from the book, [“Anyone who’s ever played pickup basketball, maybe they played high school ball, maybe they played a little bit in college, thinks they could jump on the court against Kobe or LeBron and carry their own. They don’t realize that Kobe has been playing all day, every day, religiously for hours against the best people in the industry. He wakes up earlier, he works out harder, he puts in the commitment. At that elite level people are so fucking good. What is it that makes Kobe better than everybody else? Absolute dedication and commitment. The thought that you could step on the court and compete against Kobe is fanciful.”]
The good news is that you don’t always have to go toe to toe with Kobe. As I worked through the 3,000+ minutes of recorded interviews, I found several models that most investors used and that any investor or entrepreneur can use to get a leg up in early stage investing. Entrepreneurs will benefit hugely from understanding these angel investing models. They’ll be able to easily categorize investors and spend more time with the ones that align to the type of investing partner they need for their business. They’ll be able to recognize when an investor is approaching them what kind of value they’ll likely add based on the way they approach the investment.
The main theme was a split between investors who were great at finding the next fad that would be a cultural or behavioral change like Google or Uber. These momentum investors share a lot of things with their more value oriented counterparts such as some reserve capital for following on and some don’t. The more value oriented investors are investing less on the fad becoming a reality in society and more on the rate at which the dollars are flying in the door from customers. Similarly, both groups have investors that do it part time and some that invest as a full time endeavor. Both groups have investors who want 100 different companies in their portfolio and some who just want 10 but want to be really hands on with those 10. The investors who fit into these different models tend to hang out together, they tend to invest with the same people and find companies to invest in the same way. Others are more promiscuous and invest with people who have different styles in an attempt to get investment style diversity. Not understanding these models as an entrepreneur raising capital is a recipe for a longer fund raising cycle and wasting time with a lot of the wrong investors.
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