The Ultimate Guide to Angel Investing

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Introduction

The Case for Investments in Startups

Early-Stage Start-up investing in 2021

1.Start-up investments work amazingly well in a high inflation / low interest rate environments

2. Investing in startups can operate like a savings account

3. Large multiple arbitrage between early-stage to late stage and public

Why You Should Invest as a Business Angel and not in a Fund

  1. There is empirical evidence that shows direct investments/angel investments can outperform venture capital (VC) funds. The Angel Resource Institute found that angel investors achieve returns on average of 2.5x Multiple on Invested Capital (MOIC), data further corroborated by the Kauffman Foundation. Pitchbook puts the average return of VC funds in the US between 2002 and 2013 at just 1.7x MOIC. There is similar data from a 2004 research paper from Weidig and Mathonet, showing that VC funds return 1.3x MOIC on average, while direct investments return 1.5x (the time period of their research likely including dot-com bubble write-offs).
  2. It is near-impossible to get investment allocation in the top VC funds that provide returns above the mean (think of the Sequoias and Benchmarks of the world). Most likely, out of all the possible VC funds available, your expected returns will be at or below average. If you still want to back a VC fund, I would recommend backing an emerging manager, as they tend to outperform.
  3. It is easier for angel investors to get allocation in hot deals. VC funds need to deploy large amounts of capital to make their economics work, and they often target a 10–20% stake. For angel investors, no limitations apply. You could invest varying amounts, whether that means $50k, 200k or $500k. In addition, if you bring added value, a strong reputation, and the ability to support the startup founder, you can likely get allocation to rounds most VC investors would not receive access to (albeit with a small check).
  4. Angel investors can also gain early liquidity through secondaries that drive up your Internal Rate of Return (IRR) and provide early liquidity for further reinvestment. VCs are usually precluded from secondaries as they are large shareholders whose actions bear important signalling.
  5. It’s more fun :)

How to Make Money as a Business Angel

Operationalising Angel Investments

  1. Collective deal flow
  2. Access to larger deals
  3. Ability to build a wider portfolio
  4. Better due diligence
  5. Better value creation
  6. Shared transaction costs
  7. Great networking and knowledge sharing

Enter 10x Syndicates

Conclusion

Epilogue: What to do Besides Angel Investing

  • Invest in fast growing public companies: Take advantage of low entry barriers and low maintenance costs. You will assume some risk with short-term capital loss, but in the long run, most investments should be fine.
  • Invest in a VC fund of funds or a private equity fund: Those investments tend to be less volatile and present a historical return of about 2.0x MOIC. Large entry tickets are required, typically $250k per deal. I put 10% of my portfolio in such funds for low-risk diversification.
  • Invest in real estate: Real estate can function as a phenomenal investment in periods of high inflation. Rents tend to increase faster with inflation and you can short debt, which is also a great strategy in high inflation environments. Make sure you have a fixed rate mortgage rather than a floating rate linked to an interest index like LIBOR or something similar.
  • Start or join a technology company to get company stock: It is easier than ever to raise funding, and company valuations can rise quickly. Founding a company is a good way to gain equity upside, but not as scalable as investing. 10x Value Partners can help you build your own company if this is the route you wish to go.
  • Crypto: My view on crypto is that it involves a lot of gambling, but the odds are probably stacked in your favour. Only invest a small fraction of your portfolio and diversify. Try to hustle your way in early token sales. I have a friend who made more than $10m from this.

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Christian A. Schröder

Christian A. Schröder

Founder & CEO of 10x Value Partners. One of the world’s most successful angel investors. Follow me to learn my secrets.