Software Engineers peak early in their career and especially in places in the San Francisco Bay area, New York, and Seattle attain accredited investor status early on in their career. Hearing stories of Jason Calacanis and Chris Sacca, many consider trying their hands-on angel investing in startups.
If you are considering it, here are my few suggestions for that.
Should you do it
Angel investing, just like many other exotic ventures such as buying arts and vintage coins, is optional. It is much more safe to make money by investing in publicly listed companies. So, don’t do it for money. Find a better reason to do it. For me, the opportunity to connect with other entrepreneurs makes it worthwhile.
How much to invest
Don’t invest more than 5-10% of your net worth. Most angel investments fail; it is best to diversify. In the early stages, don’t invest substantial check sizes (50K-100K) in a single startup.
How to start
Get your feet wet via Angellist Syndicates. You can invest a small amount and gain confidence. These investment opportunities come without the information rights, so, you learn a little less than what you get when investing directly.
Once you are confident, watch more pitches either at local pitching events or online pitching events like Stanford’s StartX and Alchemist Accelerator Demo day.
Whether you are looking at companies on AngelList or the pitching events, the quality will vary a lot. More often than not, you will say no, but occasionally, you will come across a gem to invest in.
Dealflow
Good deal flow is crucial. Either you will have to scout a lot of good deals, or you need to be friends with people who are going to make it big. Also, try to have some VC friends, so that, you know what not in trend. Here’s the hard reality, almost every angel investment of yours will need VC money at some point. If most VCs are going to reject the opportunity outright, for example, because it is located in unacceptable geography or is in a crowded space, then that startup is almost bound to die.
In the case of a hot oversubscribed deal, you will have to convince a founder to take money from you. And that’s where you have to answer what value-add do you bring beyond the capital. Put some thought to prepare that. Here’s mine - “I can help you with thinking around engineering as well as product. My background ranging from backend engineering at big companies to mobile development for emerging markets to blockchain gives me a unique engineering + product perspective. You can see my writings at /category/tech-thoughts/ and my prior investments at https://angel.co/ashishb”.
Learn to say no
You will be saying no most of the time. Say that fast and move on. Don’t waste your time or the founder’s time.
Don’t give up on pro-rata
Angel investing is way riskier than late-stage investing. And if you end up investing in a gem, you don’t want to miss out maintaining your pro-rata, fight for this right.
Understand the different type of investments
SAFE is the most popular now. Convertible debt creates phantom tax implications. Equity investing is less prevalent in early stage than the late stage.
Criteria
Develop some criteria to decide what would you invest in and what would you not invest in. For example, I don’t understand health tech and pharmaceutical, and I would not invest in it. Similarly, for the lack of understanding, I avoid startups targeting Latin America or Africa. Remember that laws are different everywhere; for example, in India, a minority shareholder can block an acquisition, in the USA, they cannot.
Process
Decide how you are going to invest. Are you going to decide over a phone call or multiple in-person meetings? Have a written questionnaire which you ask to ensure you are not missing on something.