How successful Angel Investors Invest by Bill Clark | Thursday, October 27, 2011
If you think you have what it takes to invest in startups and are ready to make your first investment, but unsure of where to put down your first seed investment, it may be worth your time to look at the profile of other successful angel investors. By studying their strategy, what type of investments they have invested in and how their investments perform over time, you will start to develop your own strategy that works for your pace and desired investment outcomes. You shouldn’t have the expectation that you will be able to mirror what they are doing right away because their strategies have most likely been developed over time as they have learned from their mistakes and prior bubbles. I am going to profile some of the most successful angel investors which should help as you start to build your investment strategy and begin looking for the next big opportunities.
Ron Conway is probably the best known and most successful angel investor in recent time. He has invested in almost all of the high profile successful companies in the past 10 years including Google, Twitter, Square, Paypal and the list continues to grow. Ron focuses his investing strategy on early stage high tech companies. The current markets that Ron is actively looking at are social, social commerce and mobile. The most important factor for Ron is the team. He says “We start with the people first. We think the ideas that entrepreneurs start with evolve and change dramatically from the beginning and sometimes end up unrecognizable, so we believe in investing in the people”
Ron makes a lot of small investments, which is commonly known in the industry as the spray and pray strategy, and then is able to make additional investments in the companies that perform the best. Since he invests in most of the best early stage startups and is able to spread his money around, only a portion of his portfolio needs to succeed for him to continue making money. An investment from Ron doesn’t guarantee your startup will have a successful exit, but because his network is extensive his investments certainly catch attention of a wide group of potential investors interested in getting on board.
When Ron makes an investment he doesn’t worry about the valuation he is getting as much as the typical investor. He has publically offered startups convertible debt with no cap which is very favorable to the startup. When he is investing at a seed level it doesn’t matter if the company is valued at 3 million vs 5 Million because when you are looking for a big exit the end result doesn’t change that much.
As far as angel investors go Reid Hoffman ranks right up there with Ron Conway in terms of number of deals and quality successful of exits. He is the CEO and founder of LinkedIn and has invested in Facebook, Zynga, Flickr and others. Reid is very interested in web 2.0 companies that have an innovative idea that can reach millions of users and can scale efficiently. He has three things that he looks for when he is investing in a startup. 1) How will you reach a massive audience? He looks for ideas that will reach millions of users and keep them engaged. 2) What is your unique value proposition? He doesn’t like to invest in companies that can’t distinguish themselves from their competition. 3) Will your business be capital efficient? Meaning, will your idea continue to get funding in later stages of growth.
Chris started angel investing when he was first at Google with an investment in Photobucket. Since then he has gone on to create his own fund and invest in companies like Twitter and Instagram. Chris will invest in seed and early stage technology companies as well as secondary transactions from founders who are looking at selling some shares for liquidity. As simple as it sounds he is looking for products that consumers want. This can be demonstrated with his investment in Turntable.fm. He recognized early that users would become engaged and spend a lot of time hanging out on the site. He plays an active role in the companies with which he invests in by becoming an advisor, further ensuring they continue their successful trajectory.
Chris is the co-founder of Hunch and also invests through his founder collective fund. He has made investments in companies like Skype and Milo and in 2010 was listed as the #1 investor in tech by Businessweek. Chris almost exclusively invests in seed stage deals and looks for high tech startups, but does make other investments in industries outside high tech to diversify the risk. When he looks at a company he is not only looking at the technology but also the team that is involved because as Chris states, “that is the most important aspect to the investment.” In his opinion “the environment changes, you discover flaws in your original concept, and good entrepreneurs adapt and change. The only way you would've seen it is if you'd understood the passion and guts of the people involved." He will ask people who know the founders what they think of them to get “Social Proof” before making an investment.
Peter is one of the co-founders of Paypal and was the CEO of the company before it was acquired by eBay. His most famous and successful investment to date was a $500,000 investment in Facebook for 10% of the company. He has also made investments in LinkedIn, Friendster and Yelp. Peter believes that the best predictor of a startups success is how much you pay the CEO. If you pay the CEO a large salary then most likely everyone else is getting paid high salaries and you will burn through money faster. If the CEO is paid less then it lines up their interest with the equity shareholders. He has also recently given 20 kids under the age of 20 $100Kto pursue innovative scientific and technical projects. It is clear that Peter believes the millennial generation are the visionaries of the future and he is investing in their concepts.
Before becoming an angel investor turned VC, Mike’s first career was as an entrepreneur where he co-founded Motive Inc . Mike has an interesting story because after he left is corporate gig he decided to make angel investments with his own money. He was very successful at it and then created his own fund to invest other people’s money. Mike prefers to invest in startups that have low capital requirements, meaning that you don’t need tens of millions to succeed and prove out the model. One of the most important qualities for a startup company to show Mike is a solidified team. His first investment was in Odeo which was founded by Evan Williams. When Odeo was failing Evan tried to give Mike his money back but Mike believed in Evan and said to keep the money and invest it in his next company. That company was Twitter and you all know how that story unfolded.
While Ashton hasn’t been investing for that long, approximately 4 years, he has made several high profile investments including Flipboard, AirBnB, Skype, Zaarly and about 40 others. He now does most of his investments through his partnership fund AGrade Investments. Ashton can add a lot of value when he invests because of the social reach that he has with 7.5 million twitter followers. When he looks at a startup he tries to understand what problem they are solving and how many people are in the market for that solution. He is also a big believer that you are investing in the founders more than anything so having confidence and trust in them is a big factor when making his decision to invest.Recap
If you are interested in investing in startups and want to mimic what the pros are doing look at what they look at when evaluating startups.
- They look at the founders. Good investors want to make sure the founders really understand the industry they are in, the problem they are solving and can make the decisions quick enough to take the startup to the next level. Most startups fail but a great founder can take an idea that sounded great and is not working exactly as planned and turn it into a great company.
- They look for early investment opportunities. These angels are also interested in investing in the seed stage and potentially just an idea and some founders. For Angels this is how you can make a big return on your investment because the investment is typically smaller than what a VC would make in a later round.
- They look at the idea itself. These guys are looking for something cutting edge that no one else is doing or a problem that no one else is solving, and when they find it, they jump at the chance to get involved, get invested, and see success.