3. Angel Investing 101 (David S. Rose)

Download_v2Nick Moran Angel List

David S. Rose joins Nick in the third episode of The Full Ratchet to cover:Angel Investing

  • Accreditation.  What is it?  How to get it?  Is it necessary?
  • What are opportunities for the non-accredited currently and in the near-future?
  • What’s the difference between an Angel and a VC?
  • Characteristics required to be a successful angel investor?
  • What is the average time to payoff for an angel investment?
  • What are Angel Groups and Syndicates…  and how do they provide value?

Direct-audio:  http://bit.ly/1vUILiy

Guest links:


Key Takeaways:

1- JOBS, “The Jumpstart Our Business Startup,” Act  (which was passed in 2012 but is not fully in effect)
Three major provisions:
  1. Title 1- made it easier for companies to stay private longer & made the process of going public an easier, more phased-in process for the companies that were ready to go public. (non-controversial, went into effect immediately)
  2. Title 2- General solicitation.  Companies can tell people they are raising money as long as they raise from only accredited investors. (went into effect 9/23/2013)
  3. Title 3- Crowdfunding for equity permitted for non-accredited investors (very controversial which is not yet in effect)
So remember that equity investing for non-accredited is not allowed today.  It may be implemented in near-future with disclosure requirements and restrictions on amount invested.  Currently “donation-based” or “product-based” crowdfunding is allowed.  But in this case individuals are not investing in equity, rather they are exchanging money for a product, a t-shirt or it’s just a general donation.


2- Benefits of Angel Groups/Syndicates
  • Pooled capital for more sizable angel investments
  • Pooled deal-flow… ability to see more opportunities that are well-vetted
  • Breadth of expertise and shared due diligence

and a couple of additional benefits that we’ll cover further on an episode focused on angel groups includes:

  • better negotiation power… if you bring more money to the table as a group, you can get better terms and governance included in those terms
  • and related to governance, when you have an angel leader that takes a director or advisory position, he or she can take a much more active role in guiding the startup on behalf of the group and it’s members
3- Nature of Angel Investments
The third thing that I wanted to cover is the nature of angel investments.  They are very Long-term investments…. often 10 years. As David mentioned, the volume of investments is critical from a diversification standpoint… so if you’re going to get involved and you have $100k to invest, making one $100,000 investment is not the suggested approach, rather making 10, $10k investments is more often employed by experienced angels.  And one should aim for 20, 30, 50x returns.
Recall David mentioned that with a professionally-manged, long-term, rational, angel portfolio, the returns can be north of a 25% IRR.
but on average…
  • 5 out of 10 investments fail
  • 2 out of 10 return your money
  • 2 are solid successes…  maybe returning 2-3x your money
  • and there will often be only 1 big success that will yield the return for the entire portfolio

Tip of the Week:  Don’t be a jerk