Winning as an expert angel.
How to leverage 20 years of industry experience for startups.
🖖 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!
It's always challenging (and not entirely accurate) to categorize individuals. However, we tried to identify the four most common angel types we encountered in our investment journey. In this series, we aim to explore each type's strengths, weaknesses, challenges, and ways to overcome them. Additionally, we examine the founder’s perspective and how different angel types can be beneficial in varying situations.
Our goal is to improve mutual understanding and offer a more differentiated view towards the diverse field of angel investors.
Expert Angels
Let’s start with a well known type of angels, known as “Expert Angels”. These industry veterans offer a wealth of experience, a robust network, and a passion for innovation. They may hold leadership positions, specialize in specific roles, work independently, or be entrepreneurs themselves. What binds all Expert Angels together is their years of subject-matter expertise and their desire to invest in early-stage startups.
Expert Angels are distinct due to their profound understanding of their specific industry. This expertise is not merely theoretical; it is the result of years of hands-on experience and networking. Such expertise positions them as unique investors, enabling them to recognize potential in early-stage startups that might be missed by others.
However, Expert Angels face unique challenges and strategic decisions in balancing their investment portfolio.
Goals and Challenges
Greater Investment Scope: Expert Angels should maintain a broad perspective when it comes to investments. Unlike other startup investors, most Expert Angels have limited budgets and should not overemphasize the specialized investment class of early-stage startups. Their budget allocation for startup investments should not be a critical part of their broader investment strategy, which may include stocks, bonds, real estate, etc. Startup investments carry significant risk and require a different set of rules than most other investment areas.
Too-Small Portfolio: A common risk for Expert Angels is having a too-small portfolio. It’s crucial to ensure adequate budget allocation over time for startups. Mathematically, a portfolio of 3–5 investments rarely generates any return in the venture world. A good rule of thumb to start a venture portfolio is minimum 10 investments, but rather aim for 20+. Spending time learning how to construct a startup portfolio is crucial to understanding realistic potential returns and avoiding potentially fatal mistakes.
Limited Deal Flow: Their expertise, while invaluable, often limits them to a high-quality, but narrow, deal flow focused on their industry vertical. This can be risky in several ways. First, it can lead to premature deal closures due to limited comparison with other opportunities. It’s important for them to learn to differentiate good from great over time, and to collaborate with experienced angels for advice and deal sharing. Moreover, understanding what drives a successful venture investment is crucial. A good business opportunity does not always translate into a good investment opportunity.
Strategic Focus and Diversification
Reflecting Motivation: First, Expert Angels should evaluate their motivations and set a budget for their angel investments, ensuring it does not conflict with their conventional investment plans. If angel investments are seen as a small passion project, returns are most likely zero. While this can be an acceptable approach, it's important to recognize this as more of a hobby. If focusing on returns, adopting an angel mindset and understanding the basics before starting is important.
Small Tickets, Large Portfolio: To maximize impact within a limited budget, Expert Angels often negotiate the smallest possible ticket sizes. They should aim for a large enough portfolio size to mitigate the risks inherent in early-stage investing (e.g. by following the power law). Most founders will happily accept smaller tickets in exchange for strong signaling on the cap table and expert guidance.
In addition, it’s important to note that Expert Angels are more likely to have concentrated portfolios, due to their domain-specific knowledge. While this is neither inherently good nor bad, they should be aware of the consequences. To learn more about the advantages and disadvantages of concentrated portfolios and how to determine ticket sizes, see our series on portfolio building.
Fundraising Support: Expert Angels should leverage their networks early in the fundraising process. They can be a helpful element in almost any fundraising plan, by introducing other leading minds and participating in reference calls with other investors, leveraging their reputation to the fullest.
Collaborate With Other Angels: What’s more, Expert Angels should actively seek collaborations with fellow angel investors through clubs or networks. This not only enhances their learning about venture investments but also enables them to challenge their own deals and generate more deal flow from outside the industry.
We are launching a closed angel community to exchange deals, tools and knowledge.
Get access to our weekly deal flow sharing and tools like our Return Simulator.
Collaboration With VC Funds: Another take for Expert Angels is to partner up with VC funds. They are generally open to collaborate with experts (or venture partners) when it comes to specific industry deal flow or expert analysis during due diligence. Most VC funds will be happy to connect with Experts to exchange knowledge and deal flow.
Overcoming Expert Fallacies: Expert Angels should also be aware of biases that could blind them to see potential breakthroughs in their domain. As we described here, identifying breakout cases is critical for a successful venture portfolio - and expertise bias can be a big obstacle for this strategy. Trying to actively reflect and striving to view their fields of experience abstractly is key to understand how future changes might impact their domain.
Diversify: Simultaneously, they should also consider diversifying their portfolio beyond their industry vertical. While diversification can mitigate risks, their industry-specific deals tend to be of higher quality and enhance their brand presence. Finding a balance that leverages their industry expertise while broadening their investment horizons is key.
The Founder’s Perspective
For startup founders, having an Expert Angel on board can be a strategic advantage. These angels bring more than just funding; they offer mentorship, industry insights, and networking opportunities that are invaluable for early-stage companies. Their expertise can guide startups through complex industry-specific challenges and open doors that might otherwise remain closed.
In addition, they are often an advantageous signaling for other investors and customers. While in the US it’s very common to assemble an advisory board early on to display the support of experts, in Europe it’s not that established. Still, showing expert investors is most likely seen as some sort of early vetting of your startup for other investors, especially VC funds. In addition, customers who know your Expert Angels also perceive less risk of going with a pre-mature solution.
Obviously, direct network access is often the main reason why Expert Angels are desirable for startups in the first place. They often hope for access to customers and easy closings. While it’s true that experts can open a lot of doors and their voice has quite some weight, founders shouldn’t overestimate this feature of Expert Angels. Sales is hard and there will be many other obstacles that are not cured at once, just because you have great experts on board.
In addition, all founders should be careful when it comes to so-called “sweat equity” or “buy back” deals. We see this happening again and again: Experts are negotiating shares for their work or a consulting fee which aims to recover their initial investment. While it’s understandable to do so for experts, it’s definitely not advisable most of the time. The standard seen at early-stage ventures remains to be: Investment for shares and support afterward for free, as you have an alignment of interest. This holds true when your expert angels don’t play a true operative role in your company. If they do, it’s not really an angel deal anyway.
What’s Next?
We will explore all angel types in our continuous series. In the meanwhile, feel free to check out our guide on portfolio building for angels and other helpful insights.
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.