Jeff Bishop here.
“I don’t need your money. I can get plenty of money.”
I was sitting in a pitch for The Boardroom a few months ago when the founder pitching us spoke those words.
Let me set the scene – to my right is Allan Marshall, the founder of XPO Logistics, a company currently valued at roughly $7 billion dollars.
To my left is Jason Bond, one of the top momentum traders on the street….
Sitting right next to Allan is none other than Nate Stavseth, one of the greatest business development guys I know— and the prodigy responsible for making RagingBull one of the fastest-growing companies on the planet.
Finally, just at my shoulder is Chris Graebe, a serial entrepreneur-turned-investor who made it his mission to help people like you gain financial freedom through angel investing.
And here is this founder at the end of the table, telling us that he doesn’t need our money.
However, what happened next… completely blew our minds.
Now, in another pitch meeting, with different investors, that kind of bravado might play very well. In fact, it’s something we actually look for in The Boardroom. We’re not trying to invest in companies that are struggling. Show us proof of concept, show us the money, and we’ll help you grow.
But something about this pitch meeting didn’t feel right. I caught Allan’s eye, and I could tell he was thinking the same. The founder’s valuation was sky-high. He had some really exciting promotional events coming up, that was true. Apparently, he had a big investor on the line.
But was any of it even true?
In the end, though we liked the product and the founder (honestly), we chose not to invest. It wasn’t just because the valuation was too high. It’s because of something else – a lack of humility.
Courage is absolutely necessary to get a startup off the ground. But bravado will get you killed.
This got me to thinking…
2019 has been an amazing year for me, and all The Boardroom.
But that’s small potatoes compared to what I’ve pulled in through angel investing.
One of my goals for 2020 is to shift more of my attention to angel investing. I’ll always be a “lowly trader” (as I tell my wife, the professor). We’ve had tremendous success with angel investing in The Boardroom, and 2020 is going to be even bigger, we’re sure.
Today, as we round the horn on 2019, I wanted to share a definitive list of the best advice I have for new angel investors on how to choose startups that will actually make you rich.
These are the tricks and tips I live by—and which I’ve picked up through investing experience and from my fellow Boardroom angels.
These insights will help you choose the next big winner—and make 2020 the year you achieve radical financial independence.
8 Surefire Strategies to Succeed as Angel Investor
1. Stay In Your Wheelhouse
Sometimes, as angel investors, we’re so driven to find the next big thing that we forget that old adage, “Work with what you know.”
Most startups fail. Your best bet to find winners is when you stay within your domain knowledge. This background experience can be a huge asset not only as an investor trying to spot your next deal, but also as an advisor, equipped with valuable insight from past ventures.
Even though a startup may seem sexy or innovative, if you have little knowledge of their industry or vertical, you won’t be much help to them as an investor. And if they’re only looking for funding, well, that’s a red flag.
There’s another bit of advice that goes hand-in-hand with this. Stay in your domain of knowledge, yes—but always keep that knowledge growing. The best investors are out there every day learning about their industries (and adjacent industries, as well).
2. Look For Strong Business Systems
You know that in order to succeed in the world of business, you’ve got to have a solid plan. Clear and complete, everything transferred from brain to paper. That’s business 101.
But all too often, investors accept when a founder has gaping holes in their plan. Just because their company is small or growing does not mean they should have a strategy littered with question marks.
Several months back, I was approached by a startup in the “New Foods” sector. They had an innovative solution for providing high-quality meat at a low cost to consumers. They were making good money and their margins were great. All they needed was an infusion of cash to ramp up their marketing, and it was a pretty quick path to a 10x return.
There was just one problem: they didn’t have a marketing plan.
They had the bones of one, sure. Higher an agency, hire a manager, create content for hungry (yuk yuk) consumers. But those are ideas, not plans. In the end, the founders didn’t like our deal terms enough to take our capital—and I don’t blame them. But we weren’t ready to bet the house on a company with no plan.
Pick founders’ brains for every detail about the market, product, customer, and competition. Don’t just ask where they will be in six months, twelve months, or two years—ask what they’re doing next week.
While a strong plan, in and of itself, doesn’t necessarily promise success, it is proof that founders are willing to work hard, collaborate, and see the big picture (in other words, they’re thinking about their investors, not just themselves).
3. Appropriate Valuation
Startup founders need to present a realistic valuation of their company. This isn’t just because we, as investors, want our money to go farther. That’s a much lower priority for us than the confidence that a founder has the humility and perspective to succeed.
This brings me back to that story I was telling earlier. Sure, that founder was confident they would be able to raise enough capital to hit their next milestones, but he obviously didn’t think he investors represented that important a piece of his business. Founders who treat any part of their business lightly are destined for a bumpy road.
Simply put, we don’t want anyone getting too precious too quickly by overvaluing straight out of the gate.
It’s also good to note that for angel rounds, a typical valuation ranges from $500,000 to $5 million. That’s a pretty wide gap because early-stage companies come in all shapes and sizes. In the low end of that spectrum, we wouldn’t expect much beyond the seeds of an idea. But once you’re getting into multiple-million dollar valuations, we absolutely expect serious traction —either revenue or user acquisition, if that’s how you measure success.
4. Get to Know the Founders Deeply
A great idea without a great leader working behind it will almost always fall flat. And the only way to know if a founder truly is a multidimensional talent is to get to know them.
You might have heard this story before, but Allan Marshall was one of the first investors in RagingBull. He thought we had a good idea, but more than that, he believed in Jason and me. I’m glad to say that he was right.
In the end, the entrepreneur(s) steering the ship will ultimately determine success or failure. So don’t invest your resources into an entrepreneur who’s “good enough,” or one who could one day be great. You need to be able to place full confidence in who that person is, today.
Many high-profile investors share the value of integrity when it comes to finding the right business partnerships. David Rose, Founder of Gust and The New York Angels investing group, says that integrity is an absolutely essential quality he looks for in entrepreneurs. Because of the many moving pieces involved in launching a young startup, the only thing you can truly count on is the character of the businessmen and women you trust.
Invest in entrepreneurs who demonstrate passion, resiliency, and determination. Find someone who can lead, rising up to any occasion, while setting and meeting goals, and stewarding a budget well.
It’s perfectly normal to want to invest in a business because of the people spearheading the idea. But be sure to check out the whole team. You don’t need a lopsided group. They should collectively be all-stars, in their own right.
The main leadership or management team should have a proven track record of goals met within appropriate timeframes. They should be more than capable of individually and collectively handle the many responsibilities that come along with launching a startup.
I like the words of John Rampton, a well-known Silicon Valley angel, “If an entrepreneur wants to make an impression, prove that there is past experience and credibility behind the team. It’s your team that’s going to win me over, not your half-baked idea!”
5. Don’t Invest in Unknowns
Angel investing, by its definition, comes with plenty of risks. The thing that stops founders isn’t risk, it’s the unknowns.
Whenever I sit down with founders, I always make them dig into their weakness: who their competitors are, why customers might not be so hot on their idea, major financial and sociological impediments to their plans.
The best founders are the ones who don’t flinch at these questions. They are well aware of the challenges that threaten their business, and they’re prepared to address its weaknesses.
When I catch them off-guard or if they downplay a kind of risk, then I know they haven’t thought through their plans thoroughly, and there are dangerous variables lying in wait.
Founders must demonstrate an ability to keep their head above the clouds and cast vision, while also keeping their feet on the ground, remaining realistic.
6. Invest In Companies Through Economic Cycles
When the economy is strong, everyone wants to be an investor. But it’s during the lean times that real fortunes are made.
The Great Recession, for example, was a boom time for startups. We were in the early stages of a digital revolution, and that technology was not inherently tied to the greater socio-economic factors.
Case in point: Both Uber and Airbnb were founded in the immediate aftermath of the Great Recession.
While conventional wisdom suggests retreating from certain financial or real estate markets during an economic downturn, I like to stay aggressive in the angel side of my portfolio. Of course, I’m preparing myself for this possibility. I would never look at angel investing as a way to recoup other financial losses.
I just know how to hunt during a drought. And if you want to be an angel investor, you’ll pick up this kind of situational awareness, too
7. Know Exactly What You’re Getting Into
Before you invest in any startup, you want to know exactly what you’re getting into. That includes deal terms, plans for future rounds, and your involvement as a board member or advisor.
I typically invest in companies that I believe in but also need my help. And before I pull the trigger, I make sure that the founders and I are on the same page. That usually amounts to a very clear conversation I have with the founder about what I am bringing to the table, and what I see as my responsibility as a board member.
This final conversation is only for clarity’s sake. By the time I’m ready to invest, they are more or less counting on my support.
But your personal involvement is only one aspect of a deal. As a new angel, there are a host of deal terms that you are going to need to understand. Don’t treat these lightly. If you don’t have access to a course like New Wave Wealth, where key deal terms are explained, then get with a lawyer or a more experienced angel.
8. Find Your Angel Tribe
Being an angel shouldn’t be a lonely endeavor. It’s a game of connections, after all.
When I was first getting started as an angel investor, I absorbed all I could from my more experienced investor friends, including Allan Marshall. To this day, I rarely (if ever) enter a deal alone. I count on my inner circle (aka The Boardroom) not only to help find great deals but to conduct the due diligence.
It’s all about combined brainpower and resources.
For a new angel who wants to get involved, I would highly recommend attending conferences and meetups hosted by local groups of angels. Nearly every metropolitan area will have something to this effect.
I also can’t end this section without putting in a plug for the best group of investors I know—The Boardroom.
In The Boardroom, you have the rare opportunity to join our inner circle and invest in the deals we ourselves are investing in.
Bring It On, 2020…
They say the New Year is all about setting goals and intentions.
I say, frankly, that’s bullshit.
This time of year shouldn’t be about setting goals, it should be for reevaluating plans.
Every January, you might set new and optimistic set goals for yourself – to lose weight, make a certain amount of money, or visit some exotic country.
But, really, you’re only affirming goals have really already been set for you, by your peer group, your family, and the organization you work for. Most likely, plan you inherited “your plan” from your parents, perhaps version 2.0 of what they themselves lived by.
I didn’t inherit a plan from my parents because I grew up dirt poor. I knew that their plans didn’t work (at least financially), and I had to completely reinvent the wheel.
That understanding has allowed me to think and plan bigger than any degree or early accomplishment entitled me to… And it’s why I’m the one scribbling out this article from a beach in the Bahamas.
This New Year, I encourage you to reevaluate your bigger plans before you start setting goals. Is the plan you have been executing – the plan of the employee or the manager, but not the investor – panning out the way you had hoped?
Whatever you decide, know that I will be with you—as will the rest of the Boardroom —every step of the way.