How to become a (successful) angel investor

Angel investors are crucial for every start-up ecosystem and Canada certainly needs more of them (especially of the super-angel kind!). But angel investing is not only good for the start-ups that benefit from early and risk-taking investors, it can also generate great returns for the investors. At least if they follow a few key rules. Mark Suster from GRP Partners published an excellent series of posts on angel investing in the past couple of weeks and I could not agree more with the 5 skills successful angel investors need to have: deal flow, domain knowledge, relationships with VC’s, deep pockets and access to buyers. From my own personal experience there are a few additional points to consider before launching yourself into angel investing:

  • Budget for angel investments: determine how much money you want to allocate to angel investments over what period of time. Often people start investing without looking at the big picture and then end up with only 3 large investments before running out of money. In order to have superior returns and spread risk across a portfolio, you should invest in at least 10 deals. So if you want to allocate $1 million to angel investments, don’t invest more than $100K per deal, preferably even less to leave room for follow-on investments.
  • Pace: once you are in the market, you will most likely be flooded with investments opportunities and in the beginning an apparent abundance of opportunity will meet a lack of patience on the investor side: you want to build up a portfolio and get your feet wet and all those opportunities look great. But take it easy, especially in the beginning. You will quickly learn how to differentiate the good from the bad deals but it will take time to build up this experience by looking at a lot of deals. So my recommendation is to rather watch and see in the first couple of years instead of getting into the action too quickly – you will most likely burn quite some money with the latter strategy!
  • Entrepreneur vs investor view: a lot of entrepreneurs turned investors look at an investment opportunity with their entrepreneurial eyes and imagine what they could do with the business if they ran it. But this is unfortunately not the right way to think about this opportunity as it is much more important to evaluate if the entrepreneur who is pitching the idea is able to execute against it or not. In the end, he is running the company (and not you) and in most cases it is not the idea that defines the success of a start-up but the execution.

So keep all of these points in mind when you start doing angel investments and I am sure you will not only enjoy helping start-ups but also enjoy some healthy returns.

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