Charlie Paparelli wrote a nice article last week about how to become a successful angel investor.
The core of Charlie’s writings outlines four steps to consider in building a successful startup company portfolio:
Step 1: Motivation
If you are interested in startup investing then you are ready for the first test. This is the test of motivation. Are you doing it solely to make money or do you really want to help others succeed? If it is about the money and only the money then put a piece of your portfolio with Venture Capitalists and pay them to manage your money. If you are motivated by teaching/mentoring others what you learned over the years to be successful then figure out how to invest.
Step 2: Manage and Budget
Realize that you are responsible for this investment class. Your money manager is responsible for diversification of your money. Diversification is a proven strategy to reduce risk and maximize return. Startup, or small private equity investing as a class of investment, is the high risk piece of your diversification. You, with the help of your financial advisor, need to decide how much of your money will be devoted to this asset class. Then stick with this amount. When it is fully invested then that’s it until you realize a liquidation event through cash distribution, loan payback or sale of the business. Let’s remember the purpose of investing is to make money and not “community development.” That means investment discipline.
Step 3: Leverage Your Time and Reduce Your Risk
Once you take responsibility for this investment class then you need to have a strategy. I recommend that you work with people who helped you make money in the past. Delegate the evaluation and initial coaching to these folks. The people I am speaking about are the managers or minority partners that were on your team in your company. They made money on the sale of the business but maybe only a tenth of what you made. Their retirement may be set but they are not in a position to invest in any meaningful way into startups.
These are people you trust and have a passion for startups. They may want to work full-time in the startup because they fell in love with it. They may just want to work part-time and take a small monthly fee. In either case this is the person you know and trust, not the entrepreneur. You may like the entrepreneur but you are not about to invest enough time to gain a significant trust for him. This is the job of your business associate.
This is the model that is used by significant angels in Silicon Valley. They may visit the startup from time to time but their interaction is really with the person they worked with in the past. He is the on-site advisor/mentor to the entrepreneur and the business. He is the person working “in the store” and you are the person working “over the store.” Most startup investing is “community development” because it follows the “over the store” investment approach.
Step 4: Investment Strategy
Finally, you need an investment approach. Here is a sampling of questions that you’ll need to answer. What kind of startups will you invest in? What markets are they in? Are they products or services or both? What is the size of your investment? Do you work with investment partners or do you go it alone? Do you want to be in deals that will require VC money later or do you want to steer clear of VC investment? What type of legal entity best suits your investing? How do you disburse the money? Is it loans or equity? Does it have any preferences? Are you looking for cash flow or only capital gains?
There are answers to all of these questions and I will be happy to help. The motivation and the network of advisor/mentors must come from you. These are the people who helped you make your money. The investment strategy is something that can be figured out. It is just details on how you’ll proceed in helping others while you make money.
Smart advice. The rest of the article is here.
I am one of those types that Charlie mentions that has a passion for startups and have helped other people succeed in the past.