How Angel Investors Navigate Deals with an Investment Thesis Creating a Roadmap for Success
How do you know where you’re going without a navigation tool – GPS, a smartphone, or even the “ancient” map? For angel investors, that navigation tool is an investment thesis. When done correctly, it will not only guide you along your chosen investment course, it will help you identify the roadblocks and detours to avoid.
An investment thesis is one of the most useful tools in the angel investor industry, summarizing your reasons and conditions for investing in certain types of companies. If you do not have an investment thesis or some type of investment strategy from the beginning, you may fall in love with a charismatic founder and invest in a deal you have no business investing in. This scenario happens all the time and it shouldn’t because it leads quickly to frustration and likely, the loss of the investment down the road. There is a myth that an investment thesis is only for venture capitalists—those who have a fiduciary duty to invest money in a certain way. While it’s true it is an important component to them, it is equally, if not more, valuable to all investors, especially those who are just starting out on investment roads less traveled.
Essentially, if you invest in start-ups, founders will inevitably pitch you for money (it’s the name of the game, after all). Without an investment thesis, you may find it difficult to concentrate only on the start-ups that match your investment objectives because simply, you may not know those objectives. On the other hand, a strong thesis will guide you into sourcing the right deals, with your criteria, conditions, and requirements clearly set in advance.
The Benefits of an Investment Thesis
All angels should have clear, documented investment theses due to the numerous benefits they provide. And like any good roadmap, your thesis not only benefits you, it benefits others as well. Behind the driver’s seat, it keeps you disciplined on your selections and focused on where you want to go with your investments. With a deep understanding of the types of industries and businesses you want to invest in, the risks you’re willing to take (and those you’re not), and the parameters you want to see in companies, you are much better equipped to find the right fit for your money.
An investment thesis also benefits the start-ups and entrepreneurs looking for funding. It allows them to understand what you’re looking for and what you’re not, and if you’re the right fit for them. If not, they can move on to someone who is, saving time, energy, and money in the process. This can only happen when expectations are delineated clearly from the beginning.
Finally, an investment thesis facilitates communication and dealings with other investors. Angel investors refer deals to each other frequently. What may not work for one in one instance may be perfect for another at that particular time. And no one wants to refer a deal that the person is not interested in. Not only does it waste everyone’s time, but it makes that person look as if they are ill-advised.
Tips for Creating a Strong Investment Thesis
Let me reiterate – an investment thesis is crucial for your success as an angel investor. A strong one will help develop a stong portfolio, while a weak one may indicate lower overall performance. Here are a few tips to help you create a strong investment thesis:
Do not rush it. It should take thought, research, and time.
Have a clear, simple purpose, conditions, and expectations.
Choose an industry you either have experience in or in which you are passionate about.
Determine how that industry’s impact influences your decision.
Conduct market research with both primary and secondary sources.
Analyze long-term trends and short-term events that could affect the industry.
Set specific criteria for an investment. Be clear as to what you will invest in and what you will not.
Remember diversification. While you should focus on a particular industry or sector, you can diversify other factors, such as geography, business model, technology, or customer segment to create a more balanced portfolio. This should also be calibrated with your personal net worth.
Once your investment thesis is created, you will have a detailed roadmap of where you are going on your investment journey. It helps serve as a reminder of why you do what you do and what your own investment parameters and boundaries are. And it guides you toward finding the investments that fit those objectives.
Remember, all early-stage investments are risky and can fail even with the best idea, product, and management. By investing only in companies that fall within your thesis, you are not only minimizing your risk and exposure, you will also have an increased ability to help more companies grow through your specific offerings. And ultimately, a better fit in the beginning will likely lead to a better return in the end.
Barker Associates has extensive experience working with angel investors on their investment theses. If you would like to discuss angel investing, either as an investor or as a company that requires funding, or if you have other specific areas of concern, please click here to schedule a 30-minute consultation at a rate of $100.
Angel Investors and the Upcoming Seattle Angel Conference
I have the distinct pleasure of participating in the Seattle Angel Conference as an Angel Investor. This virtual event is May 12th, and I am thrilled to be involved. The mission of the Seattle Angel Conference is to create stronger startups and more effective angel investors with a “Learning by Doing” approach. Through this approach, the angel investors provide invaluable benefits to participating entrepreneurs.
Angel Investors vs. Venture Capitalists
With all of the excitement surrounding the Seattle Angel Conference, I thought it was a good time to point out some of the differences between angel investors and venture capitalists. Before a company can determine which type of investment is for them, it’s important to understand the distinction between the two.
An angel investor provides a large cash infusion of their own money (or a group’s money) to an early-stage startup. Working with an angel investor benefits the entrepreneur through the wealth of knowledge and experience the investor possesses and is ready to share. Most have earned a substantial amount of wealth through entrepreneurship, and have experience with the exact same processes, preparation, and questions in the past. They can guide the entrepreneur through all of the bumps in the road, as they build their company and success.
On the other hand, a venture capitalist is a professional group that invests money into high-risk startups or developed companies because the potential for rapid growth offsets the potential risk for failure. While they may still offer support and guidance, the transaction is mainly one of larger sums of money and more control over the venture going forward.
While both angel investors and venture capitalists invest money in start-ups, here are three of the major differences between them:
How they work. Angel investors work alone (or in small groups), while venture capitalists are part of a larger company of professional investors. Angels invest their own money, while venture capitalists invest money from various funding sources.
The amount they invest. As a general rule (and there are always exceptions), angels invest less than venture capitalists. Angels will usually invest somewhere between $25,000 and $100,000 (angel groups could be much higher – up to $750,000 or even more). Venture capitalists generally invest millions of dollars per company.
The timing of their investments. Angels only invest in early-stage companies. Venture capitalists invest in both early-stage and more developed companies, as long as there is a proven track record showing strong indications for rapid growth.
Accreditation for Angel Investors
Many angel investors, but not all, are accredited according to guidelines established by the Securities Exchange Commission (SEC). To be accredited, the angel investor must have:
annual earnings of $200,000 per year for the past two years, with a strong likelihood of similar earnings in the near future (if the angel investor files taxes jointly with their spouse, their required annual earnings increase to $300,000) or
have a total net worth of at least $1 million (regardless of marriage and tax filing status).
Seattle Angel Conference
The Seattle Angel Conference provides education for the companies that participate, completely free of charge. The education experience alone is invaluable, allowing exposure to many professionals with a depth of knowledge to help build a company with the right attributes to move to the next level. As an investor-led event, the conference connects entrepreneurs and a collection of new and experienced angel investors, who truly are everywhere. Each investor contributes $5,500 to create a fund, estimated to be between $100,000 and $200,000.
Applying companies participate in a company review, during which the angel investment committee sorts the documentation, looking for key components of investment. This ongoing review and due diligence strengthen the entire process. In the end, six companies are chosen to present their ten-minute pitch at the final event on May 12th to get a chance for funding and a more thorough review by the investment program.
The participating startups not only receive a detailed review of their company, but also the opportunity for valuable feedback from the investors, who are often seasoned entrepreneurs themselves. While many entrepreneurs want to avoid the “tough questions,” it is only through those difficult questions that the company’s narrative increases in clarity and strength. In addition, these entrepreneurs get introduced to dozens of angel investors through the process. While they may only end up working with one of them, building that network is a huge benefit – you never know whose path you will cross in the future.
For me, personally, I have loved participating as an angel investor, as it inspires me to learn about the innovative ideas of early-stage companies. I enjoy having a pulse on what is happening in various industries and what is next through these inventive entrepreneurs. All angel investors have the opportunity, and are expected, to participate in the process, including review, analysis, and due diligence. The collaboration of investors with diverse backgrounds and experiences helps bring about a better investment decision.
Click here to purchase a ticket to this thought-provoking, inspiring virtual event and learn more about angel investing and the companies that need it. If you would like to discuss angel investing, either as an investor or as a company that requires funding, or if you have other specific areas of concern, please click here to schedule a 30-minute consultation at a rate of $100.