8 Essential Strategies for Angel Investing
Prior to appearing on the Spanish Dragons Den television show in 2014, YPO member Maria Eugenia Girón’s experience with investing was as a co-investor with private equity, focused on consumer premium and luxury brands. She joined YPO in 2003 in Madrid, Spain.
Following her television experience, she joined forces with fellow YPO member Brigitte Baumann Gervais’s Go Beyond — an early stage investment firm — and became a member of the Rising Tide Europe I and II — a cross border investment vehicle for female limited partners. She shares her top five tips for making successful angel investments and exits.
- Build a diversified portfolio.
Diversification in terms of industry, geography and rounds, drives profitability.
- Invest in a group.
Participating with others allows you to dip your toe into industries you may not be familiar with as it provides the opportunity to lean on the expertise of others and as a result, has a multiplying effect.
- Make and follow investments with an exit in mind.
The exit will define the roadmap. Even if the liquidity event is different from what was initially planned (which it will likely be), it is imperative to maintain focus on building the key dimension of value at all times.
- Keep money for future rounds.
When making an angel investment, it is good to get in early while ensuring you have funds left over for later rounds. Not being prepared can jeopardize your profit potential.
- Learn to mentor entrepreneurs.
Good angel investors are able to inspire, guide and ask the right questions to entrepreneurs; it is a sort of mentoring, an art rather than a science as it is learned with practice.
Best Practices for Negotiating an Angel Investment
“The angel investor mentality should be that of “first in, first out,” says Managing Partner at Axon Partners Group and Co-founder of Axon Capital, Alfonso De León Castillejo, a YPO member in Madrid, Spain, since 2015. “An angel investor with common shares in a company requiring successive rounds of capital will end up reducing his stake by capital dilutions, therefore, it is better to maintain a “first in, first out” strategy.”
Here are his top three tips for fostering the position of being first.
- First Steps
An angel investor must understand they are the first step in a long capitalization path for the investee company. Asking for too many rights could prevent the company from succeeding in future rounds with VC investors and potentially cause the company’s early demise.
Getting involved in the very early days means valuation is not relevant in terms of return on investment. As a consequence, term sheets should be straight forward and simple with a very basic shareholder agreement.
- Ask yourself if the company has long term potential.
- Ask yourself if there are investors interested in the business vertical, who are prepared to contribute capital in successive rounds.
- Find out how big the market is and what share you could have.
- Do you have a special angle as a stakeholder that can help the company achieve growth and capitalization plans, therefore reducing your risk?
- You need to believe the company and its team will develop the necessary traction to meet the milestones in their business plan.
“At the end of the day, the angel investor should understand “there is a time for everyone,” and look to incorporate the first SHA (shareholders agreements) rights to sell his stake in early rounds,” says De León Castillejo.