Yesterday the angel organization that I co-founded and had a big part in building had its annual meeting.   David Rose was our keynote speaker.  David started up the software company Gust.  It’s the software program 99% of angel organizations use to manage deal flow.  He also was integral in the startup of New York Angelsand has made over 100 angel investments. He has written a book on angel investing. It’s titled, “Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Startups”

Interestingly, if you don’t treat angel investing like a hobby, you should be able to earn 25% on your money. The book illustrates the math behind that number.  Here is some Twitter math I tweeted thanks to David.

In his keynote, David said that HPA was one of the leading angel groups in the entire world.  I don’t know about that, but we have invested in 30+ portfolio companies since we started in April 2007.  Those companies have created over 700 jobs, largely in Chicago.  Combined with some other things that happened, HPA was a catalyst in starting up the Chicago entrepreneurial community.  We have a full time managing director with two employees. Since we started, we have had 47 student associates that have worked for us and are now in the real world working. We have 111 angels with a goal of 140.  Out of the companies we invested in, only a few have been a total fail. Some have had exits.  Most are operating and raising capital at higher valuations. Many are really changing the world for the better.  That’s pretty cool.

Here are David’s top ten mistakes angels make.  I am guilty of 5 of them.

  1. Investing in first deal you see.  (guilty)
  2. Not doing enough due diligence, or not doing the right due diligence (guilty)
  3. Investing outside of domain expertise.  (guilty)
  4. Investing at too high a valuation (guilty)
  5. Investing in an uncapped convert note
  6. Signing docs without running through experienced lawyer
  7. Not reserving additional capital for follow on investment (guilty)
  8. Investing in fewer than 20 deals
  9. No long term commitment
  10. Dragging out the investment process unnecessarily

The best practices are something that everyone can do. They help angels establish and keep discipline around investing.

Best Practices

  1. Generate high quality deal flow.  (Network, network, network)
  2. Gather detailed info to understand business (Great due diligence separates wheat from chaff and gives you better odds of success)
  3. Select for home run “Gazelle” type company with moderated downside  (There is too much focus on Unicorns these days-angel investors don’t need unicorns to be successful)
  4. Negotiate fair terms at reasonable valuation  (Don’t junk up term sheets.  VCs will get rid of all those terms in later rounds or stay away.  Clean term sheets give you a better chance of success)
  5. Aim for 30x potential  (This means if you invest at a $3M post money, company exits at $90M)
  6. Add value through proactive support  (Use your network to create opportunities for the startup, and to find next stage financing)
  7. Follow on in all up rounds be rational in down rounds  (Press your winners, cut your losers)
  8. Prepare for most investments to fail  (In a portfolio of ten investments, 2 are likely to pay for the whole thing)
  9. Assist founders in evaluating and negotiating exits and next rounds (You have expertise, mentor your founders)
  10. Build the entrepreneurial community  (The bigger the community gets, the more opportunity there will be for you to invest in great entrepreneurs)

I think you can start an angel group and successfully invest in your own community.  But, it’s an incredible amount of work.  You also need momentum from the surrounding community that you can’t create.  In our case, we were lucky to forge a deal with the University of Chicago.  We also were located in the third largest city in America.  Other things happened in the city at around the same time to give us momentum.

If you are an entrepreneur, you can come to Chicago and thrive.  Costs are lower.  You can find mentors.  You can find talent. Customers are just outside your door.  The community is welcoming.  There are huge opportunities for women and minorities.  It’s a pretty great place to build a cool company and I am lucky to be involved in it.