Angels play an important role in the early-stage funding of startups, providing valuable capital to help them achieve their dreams, typically by enabling them to secure product-market fit.
Despite their importance, however, Australia’s angel investors are increasingly harder to come by.
LaunchVic’s Best Practices for Angel Networks report reveals seed-stage deals fell from $280 million three years ago to less than $90 million in 2017-18, and that our investment per capita is at just $3.60 compared to $5.16 in neighbouring New Zealand, $12.01 in the UK and $25.44 in the US.
We simply don’t have enough angel investors to support the next generation of ‘unicorns’ — such as Culture Amp or Airwallex — creating a missing link in Australia’s startup funding landscape which is inhibiting early-stage startups from scaling and realising their economic potential.
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In December, LaunchVic held a panel with four experienced investors from the Victorian startup community on angel investing, including best practices and strategies on building up your portfolio.
Here are six tips from the panellists for those thinking of becoming an angel investor.
1. You don’t have to be high-net-worth to become an angel investor
Matt Allen, managing general partner at Pick & Shovel Ventures, wrote a cheque for $10,000 when he first began investing, which he took off his mortgage.
While he doesn’t advise taking it off your mortgage, you don’t need to be writing cheques of $50,000-plus and slinging them out every six months.
Start off small, build your knowledge, and then expand.
2. Focus on the founders, not the data
When assessing a potential deal, Tony Glenning, fund manager at Skalata Ventures, explains, it’s likely there will be very little data or hard proof-points to hang your hat on.
Instead, focus on getting to know the founders and determine if they have the passion and drive to see the business through, regardless of its product-market-fit.
A good founder with a bad idea will beat a bad founder with a good idea every day of the week.
3. Don’t put all your eggs in one basket
Once you write a cheque, treat it as if you will never see a return, because the hard truth is, you probably won’t.
Nicole Small, investment director at Rampersand, recommends being strategic about spreading your budget across a number of deals to ensure a greater chance of success.
4. Let founders run their businesses
Chief investment officer of technology and innovation at Kin Group, Kerri Lee Sinclair, says too often angel investors get drawn into trying to take control of the business and key decision-making.
Remember you are there to support and guide these founders on their journey, not walk it for them.
Of course, offer your assistance when asked, and you have the power to do so, but these are new businesses and need fresh thinking. Let go and trust in your founders to make the right calls.
5. Are you in or are you out? Make a clear decision
As soon as you engage in investment discussions with a founder, their hopes are up. Furthermore, they likely have minimal time and need to allocate that time to activity which will bear fruit for their new company.
All panellists were in agreement that angel investors should make a clear decision on whether they’re in or they’re out.
Once you’ve said no, you can always go back, and chances are they will still need money. They are startups after all!
6. Don’t go it alone
Angel networks are syndications of angel investors who share upcoming deals along with knowledge and advice. Take advantage of learning from people who have done it before.
Quite often, a senior member of the network will share a deal they have just made, and there may be opportunities for you to contribute to the fund as well.