It’s a simple truth: angel investors win when they invest in the right startups. Were it only that simple. What this implicitly means though is something equally straightforward: the best angel investors are the best at gauging potential. Not blindly guessing, quite the opposite; it means putting yourself in the best position to predict correctly.
Those points may sound somewhat oversimplified—they are certainly easier said than done—but that doesn’t lessen the importance of gauging potential and investing in the right startups. Knowing precisely how to do that aside, let these goals serve as guideposts. How can you enhance the likelihood of investing in the right startups?
Don’t Invest Alone
Of course, there are plenty of books to read and blogs to follow, but one of the best ways to minimize risk is to spread it across a larger number of people. In 2004, James Surowiecki wrote a book called The Wisdom of Crowds. In it, he argued that in many instances, an aggregation of information from a group of people results in better decisions than any single member of the group could reach on their own. Debate his thesis as you like, but it is certainly applicable to angel investing. Find the right group, better your predictive abilities, and increase the chance of picking winners.
The Benefits of Investing with a Crowd
Though it can be difficult to find and become a part of a group, there are dozens of reasons for angel investors to band together, here are four:
- Deal flow. More people means a wider network, more applications, and due diligence performed by a diverse and greater number of perspectives. This can be ideal, especially among investors of different backgrounds and varying expertise across an assortment of business sectors. Due diligence is a time-intensive exercise, and is integral to later success. Using an online platform is a great way to access curated deal flow from throughout the country. Make sure to use a platform that employs strict due diligence measures to help your personal decision-making process.
- Learn as you go. Very often, groups of angels won’t require its newest members to write checks right away. This allows time to observe the screening process, get to understand the deal flow, and generally see how things work. In this world, practice hardly makes perfect, but taking time to learn certain practices early on may prevent avoidable mistakes. The same here applies to online platforms—take your time reading the company summary, familiarizing yourself with the Private Placement Memorandum (PPM) and the Fund Summary.
- Risk and rights. When investors group together, their money speaks louder—especially as the company they invest in continues to grow. For example, a larger angel investment may lead to other benefits, such as a board seat or the right to invest in a follow-on round. Though the initial check written by the group may be bigger, the individual investors are writing smaller ones and are therefore carrying less risk. When it comes to investing through an online platform, this holds true. Many a times, terms are negotiated in advance on behalf of the group of investors—make sure you evaluate the preferences you receive.
- Varying expertise matters after the investment has been made, just as much as it does in the due diligence phase. Investors don’t just have subject-area knowledge and proficiency, they also bring their assorted networks with them. This could be invaluable for a number of reasons: it might help the startup build crucial partnerships, it could be a way for the company to find some important early hires, and more broadly, having experienced and successful people on-call is an invaluable resource for startup founders.
Is It Inadvisable to be a Solo Investor?
Not necessarily, especially since knowledge is easier to come by and share (and sources of information increasingly multiply). According to a Silicon Valley Bank “Halo Report” from Q2 of 2014, the number of angels investing on their own has increased more than 50% in the past year. In fact, they’re up from 26% to 41% of deals done in Q1 of 2014.
Let’s return to the idea of the “wisdom of crowds” for a moment. What happens when your group of investors isn’t limited to a small number? What if that crowd was much larger—perhaps like those found on an equity crowdfunding platform—would it not reap the same benefits? Perhaps even to a greater extent? In short, if structured correctly, absolutely so. Being a part of a larger investment group, with the infrastructure to support the scale, offers even greater efficiency, more information, and a variety of options.
A well put-together equity crowdfunding platform provides just that: access to investments that were once the exclusive dominion of traditional venture capitalists. It does this through a rigorous screening process, extensive due diligence, complete transparency, and top-notch customer service from qualified people. In this case, the larger crowd works completely to your benefit.
The choice, as always, is yours, but it shouldn’t be predicated on misinformation. Whether you decide to invest alone, as a part of a small group, or as a part of a larger one, you should know what you’re getting yourself into—the resources at your disposal, the work you will (or won’t) have to do, and the investments available to you.