The #1 Angel Investing Mistake

The list is of angel investing mistakes is an awfully long one, equally as long as the list for liquid investments, plus a bunch more.  On the too-aggressive side: believing the hockey stick, ignoring the management holes, and overestimating product acceptance.  On the too-conservative side: my favorite startup myth, thinking that because competitors exist, opportunity doesn’t. That logic is behind some of the biggest groans of regret ever, including the countless folks who said “no” to Google early on for that reason.

Despite all the competition, there’s a clear number one error in my book: failure to keep dry powder for the inevitable, yet somehow always unexpected, “re-opened” first rounds. My experience is that the best yielding exits come after a couple of re-ups at something right around the initial valuation. This isn’t surprising.  After all, the early stage world’s favorite word these days is either “pivot” or “iteration.”  We know that there will be dramatic twists and turns, which is why the “bet on the jockey, not the horse” mentality is so prevalent.  And yet, somehow, many angels don’t plan accordingly.

Sure, you’ll always have your stake in the company that needs just a bit more capital to get going.  But, obviously, you’ll get diluted in the process, and sometimes very badly. Some of the most successful early stage investors are exactly those who look for cash-strapped but promising companies, and then come in with heavy-preference money the entrepreneur can’t refuse.

Obviously, this doesn’t mean that you should pony up new cash every time you’re asked. And it doesn’t mean that you have to play at every subsequent stage of the company’s development.  But it does mean you should have the resources and patience to stay in the game when that bootstrapping startup misses a ship date, or has an early customer go out of business.  It also means you need to stay informed enough about the company along the way to make an informed gamble on which companies have hit the inevitable bumps in the road, and which are actually in the ditch beside it.

Nothing is more frustrating than having been “right” about a company, taken big risks to support it, and winding up with almost nothing on the exit. Don’t let it happen to you.

 

 

All opinions expressed are those of the author,  and do not necessarily represent those of Gust.

Bob Rice , Managing Partner, Tangent Capital
February 10th, 2012