People often asked what the value of angel investing is as part of an investment portfolio. I always answer: “compared to what?” In my experience over the past fifteen years as an angel investor, the answer to this question depends entirely on the expectations on the individual investor.
Angel investing is one of the alternative asset classes, alongside such alternatives as building up a good wine cellar, buying jewellery or artwork. But in contrast to these other alternative investments, angel investing has many ‘psychic’ returns that the others do not have. By this I mean that the angel investor, apart from the potential return on at least some of his investments (if he invests wisely), has the knowledge that his investment is creating local employment and developing the local economy and the lives of the local community.
On average, angel investors lose money, so it is important for these investors to have other motives behind their investment. The top 20 investors make all the money – in line with the (80/20) Pareto Rule. In the world of angel investing, hobbyists rarely make returns. Those like me, however, who become addicted to it, find that they come to a point where they can no longer live without the buzz and excitement, and feeling of contributing to the local economy, which angel investing provides.
So how do we manage the deal flow, and what sort of criteria do we use to filter out those investments which we will not invest in? We always look for deals with recurring revenue streams, at a minimum of $10,000 to $20,000 per month. We don’t invest in pre-revenue start-ups, and we only look at those companies which already have a minimum level of monthly revenue, and which can be scaled up in a reasonable time frame. Having an exit strategy is vital, so that investors can recover their capital, hopefully with a decent return, and reinvest as new offers come up.
So what about the age-ole question of whether you should back the ‘’jockey’’ or the ‘’horse”, that is, should you look most closely at the team behind the concept, or the concept itself? Unfortunately, the answer can mostly only be determined with the benefit of hindsight. No-one sets out to invest in an idea which has no merit, nor indeed, in a management team which cannot drive the idea forward to the next growth stage. The number one reason that our investments have failed in the past has been due to us short-funding the found, and not giving the company enough capital to enable them to take enough risk to expand at a sufficient rate.
Ultimately, my view is that the secret to angel investing is persistence – of the board and the management team, as well as the community of angel investors. Only those who become totally committed to winning will have the fortitude to get through both the tough and the good times.
John Huston launched his angel group in 2004 after retirement following a thirty year, distinguished banking career. Currently investing in their fourth fund, the Ohio Tech Angel Funds invest solely in Ohio-based tech start-ups. With 340 members, it is the largest angel investment group in the US market. John previously served as Chairman of the Angel Capital Association. Inspired by Golden Seeds, his wife, Carol Clark, has also founded X2 Angels, which supports local tech companies managed by women.