At the Angel Excelerate program that I attended, Brad Feld was kind enough to take some time and speak to us from Tuscany. He said some enlightening things when it came to angel investing.
As I listened to him speak, I found myself drifting back to Finance classes I took at the Booth Graduate School of Business. If angels don’t know about Portfolio Theory and Efficient Market Hypothesis, they ought to brush up on it. In an indirect way, that’s exactly what I heard when Mr. Feld spoke.
Instead of trying to invest a lot of money in a few winners and taking a lot of risk, invest the same amount of money a little at a time in many of promising start ups, spreading out your risk.
That sounds like buying the S&P in a low cost mutual fund instead of stock picking.
Brad made a great point when it came to valuations as well. He said to constantly invest over time. Then market fluctuations won’t matter. When the market is frothy you will buy some highs, but when the market is low, you will buy some lows. It all evens out in the end.
That sounds just like Efficient Market Theory, and putting away a little money monthly for retirement.
Then he turned his sights on the angels themselves. Angels shouldn’t just write a check and give it to the business. Angels need to add value.
The first way to add value is to make a decision in a reasonable amount of time. Hemming and hawing doesn’t do anyone any good. It kills the entrepreneur, and the more the angel thinks the less risk loving they become.
If you are not enthusiastic about the opportunity, don’t invest.
He also talked about market size. It’s important to have a general idea about market size, but you can’t size a market and put it on an Excel spreadsheet. The spreadsheet you create isn’t going to tell you anymore than the research you do on the market sector the entrepreneur is attacking.
Next, show belief in the entrepreneur and business team. If you don’t believe in them, don’t invest. You will have to support them at some point during the process. So, give them confidence. Mentor them.
Bring more people to the table. It ideally will be customers. But it could be other investors, people who make connections for the business, or next round investors. You don’t have to be involved in the day to day operations, but be on the perimeter helping in any way you can.
I really think that old pit traders can make great angel investors. They have the necessary characteristics. They can size up an opportunity quickly. They understand risk/reward and can write a check. They are used to weathering ups and downs. More old broken down traders looking for something to do ought to consider joining a local angel group. We have a few in Hyde Park Angels and they are great members.
I thought it was a great two part presentation. It’s why Feld is looked upon as one of the best angels out there today.