. . . . . . here’s my list of the worst angel investing practices, with a tip of the hat to John Huston and the Ohio Tech Angels, who have used this teaching method for many years. Avoid these 10 mistakes or your angel investments could be losers right out of the gate:
- Put all of your angel money in one investment. Angel investing is risky – more than half the time startups fail. The U.S. is full of former angels who only made one or two angel investments and lost all of the money they set aside for angel investing.
- Accept a sky-high valuation from the entrepreneur. Some angels invest in deals with valuations they know are too high. Why? They either believe they will miss out on a really great company or don’t want to start out a relationship by being disagreeable. The problem is with an out of whack valuation, you end up owning a very small percentage of the company which reduces the odds of making money. Additionally, if the company attracts a next round of funding, it will likely be a “down round.”
- Calculate your potential returns only on going public (rather than through acquisition). It’s true that there have been some fabulous IPOs by angel-backed companies, however the overwhelming number of exits – close to 90 percent – are mergers and acquisitions. Rather than the 110X angel investors attained when Green Dot GDOT -0.07% Corp went public, M&A returns are often in the 3 to 10X realm.
- Calculate your return with only one round of investment. Newer investors are often surprised to learn that successful companies usually need to raise several rounds of capital to become successful. Estimating and anticipating how much money will be needed in future rounds . . . . .