Having been engaged in angel investing for over ten years, during which I invested in more than 60 startups, I’ve gained valuable insights into the do’s and don’ts of this venture. Drawing from my own experiences and observing mistakes made by fellow angel investors, here are five crucial pieces of advice for those new to angel investing.
Steering clear of these pitfalls not only enhances the prospects of achieving favorable returns but also makes the investment journey financially less burdensome.
- Value the team over the idea
For novice angel investors, the evaluation of an investment opportunity often centers around the appeal of the idea. However, seasoned investors prioritize assessing the team executing that idea. The success of a startup hinges on the team’s abilities, motivation, and skills. An idea without proper execution holds little value, and my most successful investments involved teams that made significant pivots, reshaping their business concept after my initial investment. While business ideas are essentially hypotheses, the team’s qualities play a decisive role in a startup’s success. In two of my most successful investments (with returns of 30-50x), both startups made a significant pivot, changing radically the business concept after my investment.
“Experienced investors prioritize the team over the idea.”
2. Invest smaller amounts but into more companies
New angel investors, flush with recent financial gains, sometimes too eagerly invest huge sums to various investments, including startups. Given the high risks in startup investments, it’s advisable to diversify by investing in at least ten, preferably 20 startups. This strategy minimizes excessive risk, ensuring that potential losses are distributed across a portfolio. Consider your investment as a fraction of your overall portfolio, allowing you to sleep soundly even in the event of a total loss.
“Consider your investment as a fraction of your overall portfolio, allowing you to sleep soundly even in the event of a total loss.”
3. Avoid falling for impressive revenue figures and prestigious clients
When evaluating B2B startups catering to corporate clients, exercise caution with those emphasizing impressive local customers list and high monthly fees. Client churn takes time to manifest, and initial success in a local market often does not translate to success in foreign markets. Be wary of startups claiming to have developed solutions for well-known clients, as these solutions are often tailored to specific business processes and may require substantial modifications for wider adoption
“Success in a local market often does not translate to success in foreign markets.”
4. Say “No” more often than “Yes”
Novice investors may rush into numerous investments without thorough evaluation. It’s crucial to resist the temptation to invest in every opportunity that comes your way. Experienced angel investors take their time, carefully assessing opportunities and saying “no” when necessary. Quality trumps quantity, and a rushed approach can result in a lower-quality portfolio.
5. Grasp the big picture
Angel investors must see beyond the immediate investment and understand the startup’s trajectory. Consider whether the startup will require additional funding rounds and assess the founders’ stake post-angel investment. Maintaining founder motivation is vital, and investors should ensure that their contributions, combined with those of other investors, provide sufficient capital for the startup to reach key growth milestones.
Our mission is to educate investors
In conclusion, navigating the world of angel investing presents challenges, and educating investors is a key mission of the Estonian Business Angels Network (EstBAN). We offer trainings, assistance, and advice to its members, but we also carry through international events and projects.
From May 20-22 next year, EstBAN will host the largest-ever business angels congress in the Baltic region – the EBAN Congress Tallinn 2024, inviting all interested individuals to join and explore attractive investment opportunities.
If angel investing intrigues you, consider joining the network and participating in the congress in May. Information about the tickets is about to be published within coming weeks.
Lauri Antalainen, EstBAN President