Given the success of so many technology companies it is no surprise that many investors want to find the next Alibaba, Whatsapp or Uber at an early stage. We only hear about the success stories from angel investors at cocktail parties but most angel investors will tell you from experience that investing in start-ups is a lot like buying a lottery ticket. While many factors such as the idea, the speed of execution, and the team are important to evaluate deals, three simple rules have proven time and again to help increase odds of success when investing in young companies:
- Process: Most angel investors who are new to investing commonly only ask who else is investing. While it is important to ensure there are credible dollars backing the investment, it is probably even more important to make sure that you have someone who can size up the market, the team, and the product. Make sure to have someone who can perform this due-diligence on your behalf and can bring in relevant experts in the sector you’re investing in.
- Control: Hot markets bring more hot deals which in turn bring so much money to deals that they end up becoming oversubscribed. Make sure you keep a lid on the number of angel investments you make in a period and find a way to control the amount you invest. It is easy to get drawn-in to meet the minimums from each hot deal and before you know it, you are over-allocated.
- Diversification: Experienced angel investors who invest actively in early stage companies will tell you that only a handful of deals have a shot of doing well. This means that a lot of the investments made by angels fail. One way to mitigate this risk of failures is to make smaller investments in more firms (rather than more size-able investments in fewer firms) and reserving extra capital for your winners. When it comes to seed investing, there is strength in having numbers to ride out the ebb and flow of the markets.
Disclaimer: This material is the solely opinion of the author and does not represent an official statement by BluePointe Capital Management, LLC, nor does it constitute a recommendation for the purchase or sale of securities. No representation is made on its accuracy or completeness of the information contained herein. Although the information provided is from sources we believe to be reliable, we do not guarantee the accuracy or timeliness of any information for any particular purpose.