Why Business Angels Should Invest Like VCs
How can an Angel Investor Increase the Odds of Winning?
The answer is simple:
Executing VC strategies
What does that look like:
Step 1: Forget your emotions
It doesn’t matter whether you like a team, a story, or an industry or not. Work on assessing opportunities from a logical point of view and don’t get too emotional about anything.
Step 2: Weed out every story with a less than 10x return potential in the pitch deck’s script.
Think like a VC — once you are detached from emotional choices, look at the promise the team makes.
Do you believe a team that thinks of a 2–3x return potential will create a 100x return by chance?
It might happen like winning the lottery, which has a chance of 1: 300 million, which is better than being alive, but below the 1 out of 10 VCs realize.
Step 3: Put the remaining ones on your shortlist
Companies that pass the filter of at least calculating a 10x minimum return potential for you, as well as showing confidence in delivering that after a few rounds of questions, end up on the shortlist.
Step 4: Evaluate the team.
Check the team.
Do they have a track record?
Did they work in the industry already? Which means contacts.
Did they already perform successfully as a team somewhere else?
Has one of them already raised venture capital for subsequent rounds successfully?
And finally: Do you believe the team can go through hard times together and deliver a positive result?
Step 5: Allocate only 5% of your capital in one bucket
Even if a company passes through all filters successfully, allocate only 5% of your money in one bucket.
When I look at the statistics, the average ticket sizes are:
Many companies will also accept smaller checks, but it gives a first allocation framework for their investment allocation.
- Be aware that invested capital cannot be redeemed for a minimum of 10 years, and it entirely depends on outside events — you are locked in
- That BA investing makes sense the minimum size of the capital pool that can be locked in for ten years should be USD 600,000
- BAs with less capital — e.g., 200,000 should allocate 10k per company, not more.
Step 6: Define the role you want to play in companies and diversify accordingly
There are different opinions on dealing with invested companies as a BA, and all have their pros and cons.
I believe that BAs are investors and should promote their investments positively within their circle of influence. They are not the extended executive board. Should they be involved in day-to-day operations or board members, this should be a different contract.
In principle, diversification in high-risk games is a smart thing to do, and I agree on this point entirely with Ray Dalio.
When a company creates returns, stick it in 20 more companies, increasing the probability of further returns.
The thing is, creating portfolios of more than 20 companies lowers the downside risk without diminishing the upside potential. However, there isn’t enough time to work with every corporate team.
That’s why — be clear on the role you want to play.
Warren Buffett called it the Punchcard method, Ray Dalio Diversification. What you get as a result are
- cashflowing assets long term while
- minimizing the downside risk without
- infringing upside potential
Yes, it is true. Going all-in in Tesla in 2010 would have created tremendous wealth. Ten thousand dollars back then at 17 dollars would have bought 588 shares of Tesla. The 5:1 stock split in 2020 would have made 2,940 shares of Tesla at a price today: 907 dollars.
Total return: over 2,6 million dollars.
Just imagine throwing all your money on the one-tesla opportunity, or even better on private companies…
Let me remind you:
For every Tesla’s you find 9 Wirecard's. The German-Austrian company Wirecard went bust in 2020 after a few billion cash in bank suddenly disappeared.
Investors who went all-in on Wirecard went bankrupt right after.