A hundred startup deals – the milestone that IESE’s Business Angel Network will shortly reach – can pan out into almost as many different outcomes: a multiplicity of investor recipes, unforeseen business situations, investment trends, hot sector waves, or be subject to entrepreneurs’ idiosyncrasies.
So if you are a novel investor and don’t want to miss the next startup icon, by all means take the plunge. But, of course, look before you leap. These five tips from our savvy business angels will help you know how to focus your investment:
- Dare! Do it! If you are yet to make your first investment, do not dwell on it for months or years. To overcome your fears and risk aversion, pick a good team and a sensible business model with a large market in a sector that you know well. We have seen dozens of investors over-analyze everything from business plans and benchmarking every startup against the best features of other ones, to looking for self-confidence reflected in the eyes of the entrepreneur. Yet even with all that effort, they never close a deal. And it is not a question of money. It is very unlikely your first investment provides Facebook returns. But if you are prudent and wise and invest a modest portion of your liquidity, neither will your first go at it lead you to bankruptcy. So just do it.
- Share everything: impressions about a company, deal screening, opportunity evaluation, negotiations and investments with peers. After all, the more heads you put together, the greater the perspective. Early stage investment is not a heavy weight arena and business angels are especially collaborative. The usual investment crowd in our latest deals includes several business angels. For example we have seen groups composed of two to five including an early stage venture capitalist and an institutional investor. Angels bring between 50,000 and 300,000 euros to these deals, often doubled by the other co-investors. Individual angels’ portfolios are more and more cross-related.
- Follow your instinct. There is a tendency, particularly among the less experienced investors, to follow a reputed investor, the most vehement opinion, or to expect consensus over a project. If your appraisal of investment opportunities never matches others’ views there might be an issue. But, from time to time you may be the only one to believe in a startup, so go for it. We have seen attractive returns from companies that many angels disregarded. The brave individuals with a good hunch went for it, and their instinct didn’t fail them: Privalia.com and Tudespensa.com are proof of how following your gut can sometimes be the best criteria to follow.
- Diversify; the perfect startup does not exist. If you are looking for the perfect match you will end up going full-circle to the starting point of this post: not daring, not doing. Any startup can be affected by slow reaction to market changes, new technology standards, unfortunate pricing, or an entrepreneur’s life ups and downs. The future is difficult to predict at the early stage where angels invest. The best returns will appear when you build a portfolio with 10 to 20 companies in different sectors with a variety of co-investors and good entrepreneurs; this is the foundation for a perfect project.
- Don’t be ashamed of your ignorance. Do you think a successful corporate finance partner does not have anything to learn about buying a small percentage into a startup? You’d be surprised. Nor will your company valuation tools give you the answer; accounts do not balance, and rates are non-performing, and what about quarterly reporting? Angels need to become familiar with the specifics of startup opportunity evaluation and negotiation, investment terms and with how to deal with co-investors. Check out training programs for angels, don’t be afraid to ask the most experienced investor endless questions, tell the entrepreneur to explain in detail if you can’t follow their jargon (CAC, LTV), etc. Just be sure to keep asking.
The IESE Angel Network has been helping startups since 2003. Together, these business angels have invested more than 24 million euros, with the average deal being in the amount of 150,000 euros. This environment is a source of enrichment and continuous learning; these five tips are just the starter.
Juan Roure is a Professor in the Entrepreneurship Department and has been a member of IESE’s International Advisory Board (IAB) for the last ten years. He also currently sits on the International Advisory Board of IAE (Argentina).
He was a Visiting Professor at Stanford University, INSEAD, Harvard Business School and CEIBS (China).
He holds a Bachelor’s Degree in Industrial Engineering from the Universitat Politècnica de Catalunya (UPC), an MBA from ESADE, an ISP from Harvard Business School and a PhD from Stanford University.
Amparo de San José, Director, IESE Business Angels Network