What if money isn't everything?
How to do startup investments without experience.
🖖 Welcome to Closing The Gap by JVH Ventures. After founding multiple companies, investing directly in 50+ startups and 10+ funds, we realized that a common understanding between founders, angels, and VCs is often missing.
We want to close this gap and combine perspectives from all sides.
Our goal is to look behind closed curtains and tell the honest truth.
Follow along to gain insights from all directions!
Angel investing is often seen as an exciting investment opportunity from the outside. However, the reality looks different, of course. Especially if you are starting out to do your first ever investment, without prior startup experience.
In this fourth part of our series on angel types, we look into angels who are not embedded in the startup ecosystem yet, but still want to grow into an angel role.
The 'Money Angel' represents a specific subset of angel investors, with small to large-budget and limited experience, compared to other angels. Most of them have accumulated some wealth with their main job, some of them might have even inherited some money. Now they want to get into the exciting world of startups.
Like in other markets as well, these private startup investors are also called “retail investors”. Often they depend on publicly available deal flow on crowdfunding platforms. Still, they can make a valuable contribution to the startup ecosystem and can overcome their individual investment challenges.
Understanding The Challenges
Embarking on the journey of angel investing, especially for newcomers with limited resources and experience, presents several distinct challenges. These challenges are not just barriers, but also learning opportunities for those entering this high-stakes field. Here's a closer look:
Budget Constraints: While some Money Angels start out with a large fortune, most actually have a limited budget compared to many other startup investors. Especially, they need to watch out to not overly allocate their wealth into startups, as this is an asset class of extremely high risk. In addition, their budget constraint must not lead to the creation of a small portfolio, which in turn even increases the risk embedded in each of the startups.
Little Access to Opportunities: Money Angel, who are new to startup investing, often lack the extensive networks of more seasoned angels, which can limit their access to high-potential startups or to any deal flow after all. Often, they get opportunities to invest in startups that have already been reviewed and passed over by experienced investors. The startup investment landscape is competitive, and without established credibility or a track record, gaining access to the best deals can be challenging. The most interesting deals we are investing in, have normally highly competitive rounds with everyone on the cap table being squeezed together or some even being kicked off by the founders.
Too Small Portfolios: Smaller portfolios face difficulties, because they generate too little opportunities to land a big hit. As most startups fail (ca. 60-90% failure rate), it’s essential to make enough investments to find the one which covers the losses of the rest of the portfolio. The underlying mechanism is called the Power Law. Read more about it here:
Limited Experience in Selection: Without prior experience in startup investing, new Money Angels might struggle with conducting effective due diligence and understanding what drives outlier returns. Understanding market trends, assessing technology viability, and predicting consumer behavior are skills typically honed over time. New investors may not yet have the depth of knowledge required to make informed decisions.
What To Focus On
Reflecting Motivation And Building A Strategy: There are many reasons to find angel investing attractive as someone who is not into startups. Whether it's seeking returns, gaining experience, expanding networks, or enjoying the entrepreneurial spirit - everything can be a relevant driver. However, it’s super important to have a clear goal when it comes to angel investments. Only then the strategy for the entire portfolio can be mapped out and aligned with conventional wealth investments.
Joining A Syndicate Or Club: When it comes to the exclusive world of startups, access to deal flow and knowledge is almost everything. Leveraging the collective experience and resources of an existing group can catapult “outsiders” forward quickly. Even though they might not be that obvious, there are quite a few syndicates out there, willing to take on new members.
Even though we are not a syndicate, we share our deal flow with a hand-picked group of other investors. Feel free to sign up here:
Invest In VC Funds: As investment climate changed over the last years, VC funds are increasingly happy to accept smaller tickets from investors (e.g. around €200k). As there are many great funds that have extensive collaboration with their Limited Partners (read: investors in the fund), Money Angels also gain the opportunity to learn from professionals and tap into their deal flow.
Being Selective With Public Platforms: When it comes to public crowd investing platforms, Money Angels should match them carefully with their mapped out strategy. While AngelList in the US is a very common tool, even for top tier startups to use, there are not many similar offers in Europe. Understanding the differences between debt and equity-based crowdfunding is essential for the investment strategy (e.g. most “professional” startup investors only do equity-based rounds). In addition, highly competitive deals and attractive startups almost never use crowdfunding instruments (with some exceptions depending on their strategy, of course). This leads to the so-called “adverse selection bias” and can be disastrous for a successful angel strategy.
Essentially, it means that investors with lower market access only see the deals all others passed. Making them inferior as investment opportunities.
The Power Of Making Enough Investments: As all other angels, Money Angel must understand the implications of the Power Law and the consequence of making enough investments to be able to discover an outlier that returns the losses.
Hence, they should see their startup investments as a portfolio, instead of individual deals. With limited budget, it’s detrimental to set boundaries of ticket sizes and remaining disciplined even if “a big opportunity” arises (believe us, there will be plenty of those when time goes on).
Staying Patient: After seeing many deals, it gets easier to distinguish good from great. Joining a syndicate can be a catalyst here, as it normally brings both high quality and high volume deal flow. When going alone, it’s essential to not rush and be aware of both the described adverse selection bias and the experience gap.
Exploring Individual Deal Flow: When it comes to making individual angel investments, Money Angels can utilize platforms like addedval.io in Germany for startup matches and attend angel networks and VC events to broaden their exposure. Also, there might be opportunities, to position themselves as expert of a specific field. This way they can leverage their unique skills or industry knowledge to add value as Expert Angels, as we described in depth here:
The Founder's Perspective
As we discuss the internals of Money Angels, it's crucial to understand the perspective of founders and startups on the other hand.
The most accomplished founders often seek more than just financial input; they look for investors who bring value to their cap table. This quest for value-added investors presents a challenge for Money Angels, possessing limited additional value for startups.
However, this doesn't imply a dead end for new angel investors. Many situations exist where capable founders are open to onboarding angels primarily for their financial backing, while still presenting a legitimate chance for investment returns. These scenarios include:
Bridge Rounds: In these funding rounds, startups often need quick financial boosts to reach the next stage of their development. This presents an opportunity for investors who may not have extensive experience but can provide the necessary capital.
First-Time Founders: Entrepreneurs who are navigating their first startup venture may be more open to securing their initial capital, even from angels with limited experience in the domain.
For new angel investors, it's important to recognize and respect the founder's desire for value beyond capital. While their primary offering might be financial, exploring ways to add non-monetary value can enhance Money Angels’ attractiveness as investors. This could involve leveraging their industry knowledge, networks, or other resources to support the startup's growth.
Thank you for reading! If you liked, feel free to share it with someone else who could profit from it - angels, founders, VCs, anyone :)
PS: We are always happy to answer your questions or take on topics you want to hear about to close the gap! Just let us know.