On this episode of The Full Ratchet Nick covers part 2 of Best Practices for Seed Investing including:
- Overview of Seed Investing
- Developing an Angel Investor Strategy
- Identifying startups: Deal-flow
- Evaluation & picking startups
- Structuring the Deal
Today we cover how to develop an angel investor strategy and next time we will address #3, deal-flow.
Section 2: Developing an Angel Investor Strategy / “Rifles vs. Shotguns”
- Motivation / Goals
- Investment Strategy & Portfolio
- Seed & Follow-ons
- The Thesis
- Team Sport
- Target Return
- The Gambler’s Ruin
- Target Ownership Percentage (Valuation & Investment Amount)
- Reputation & Contribution
And with that, we wrap up section 2 of best practices on Angel Investor Strategy.
While it’s true that picking the right startups to invest in trumps all… it’s an investor’s system that gets them in position to choose, invest decisively and protect their investment.
If you’ll humor me for a bit I’m going to take a couple minutes to talk sports… The other night I was watching the 30 for 30 episode on the NFL draft that included Elway and Marino. There were a number of QBs drafted before Marino and we all know how that played out. This is a loose comparison, but it got me to thinking about how difficult it is predict a player’s success, even with a large body of video, scouting, background research, etc. There are organizations and more specifically GMs that have a very poor track record when drafting players. Conversely, there are organizations and GMs that have performed consistently well above average for many years. Do they have a crystal ball? Can they predict the future? Of course not. Can random, uncontrollable events like a career ending injury cause an excellent pick to lose 100% of it’s value? Sure. So why then are there consistent over-performers and under-performers? As Jerry Neumann mentioned, everyone’s got a system. Some have no reasonable basis for their system and use anecdote to predict all future outcomes. Many will abandon their system and rules when a flashy, exciting opportunity, with tremendous upside, becomes available. I ask myself, are the Krafts and Bill Belichick are going with their gut? It seems more likely that they have a system, they understand sources of risk, they estimate the liklihood of success by measuring those risks, and they don’t deviate from the system. Great players come and go but great coaches & GMs sustain success…
Are they truly shooting from the hip or is it like Jerry said on the show… where the best have great systems, they just usually don’t talk about them?
An analysis of the nfl draft by economist David Barry found that 88% of the time, where in the draft a players is picked, remarkably, doesn’t correlate with their ultimate performance per play. Does the 12% of the time warrant the premium one has to pay?
So circling back to Mr. Dan Marino… he was drafted with the 27th pick. He went on to become one of the greatest of all time. There were 26 opportunities to choose him before he was drafted…. ultimately, it’s just really hard to pick. Whether it’s the next Marino or the next Facebook. But if one builds a portfolio using best practices, good economics, strong risk/reward profile and gets theirself more at-bats… they’ve created the best opportunity for success.
While we spent most of today talking about the aggregated best practices on the system of angel investing… on the next episode of the Full Ratchet, we get into the fun stuff that I’ve been looking forward to. What do the best advise when evaluating and picking specific startup investments? What are the key terms and elements in a negotiated deal? All that and more on angel investing best practices part 2, coming out on Wednesday, the 12th.
If you’d like to review or print out these best practices, hop on the site over at fullratchet.net. There you can sign-up for the newsletter and review all the items that we covered today.
Please do me a huge favor and share a link to this post on these best practices. The link is real easy it’s fullratchet.net/Angel. Whatever social site you use, whether it’s facebook, linkedIN or Twitter, if you found some value in me pulling together these expert opinions than all I ask is you send out a quick link to the post on one of these social sites. And even easier you can just go to the page fullratchet.net/Angel and there are little icons for facebook & linked in which you can just click and then share. It has taken quite a bit of time and it would be great if you’d help me out with that.
Until next time remember to overprepare, choose carefully and invest confidently… see you soon for part 2.