Note: This article is the last in an ongoing series for angels new to investing. To learn more about building an angel portfolio, download this free eBook today - Angel 101: A Primer for Angel Investors or purchase our books at Amazon.com.
One of the best parts about angel investing is all the great stories you gather over the years. Whether regaling your friends over a drink at the bar, or telling your grandkids about the time you invested in (insert name of very successful company here), angel investing will provide you with a wealth of experiences.
This article will give both Christopher and Ham a chance to tell a couple of their favorite war stories.
Ok Christopher, let’s start with you...
Q: Give us an example of an investment you wouldn’t make today, but you did make years ago. How did it turn out? What lessons did you learn?
A few times I have bet on good people I liked, but my motivations were too personal. Liking the person is not enough - you need the rest of the package. In one case I got out alive with a 2X, but the deal terms were awful and the returns should have been much better. In another case the money is probably safe, but the business will never exit, and I will never get liquidity. In the rest of the cases, the businesses were total or near total failures. I’ve learned the hard way that you need to look for the whole package - check all the boxes - even then you will still be wrong half the time, but if you don’t, it is an utter crapshoot.
Q: We’ve all invested in a sure thing that had many ups and downs. Can you tell us about one of your roller coaster rides?
I’ve seen a couple situations where the original hypothesis was not working out at all, and hope was waning, but then a new technology came along and really saved the day (interestingly, in both cases it was the iPad and associated use cases that enabled the businesses to come back to life and thrive.) You really feel like you have dodged a bullet when that happens. I guess it is better to be lucky than good! I’ve also invested in many rounds with one company that launched with a good idea, but it turned out to be horrible timing because it was a luxury/nice-to-have product, and a recession struck right after they launched, so they hit a wall. So they pivoted and next they recycled some of the core skills and went after a totally different market with a totally different product. That market turned out to be really hard to sell to, and growth was elusive, so they had to pivot again. After many rounds of tinkering, they began to dial in on a big pain point for a third, unrelated, customer set. Fast forward to today and they are growing like crazy, have a high valuation, some big investors and very bright prospects. But it was a pretty gut-wrenching 3 years for everyone involved. What ultimately saved them was a very broad and strong investor base who could support the company by passing the hat and everyone chipping in a little, and strong CEO who communicated well to that group.
Now Ham, it’s your turn...
Q: Give us an example of an investment you wouldn’t make today, but you did make years ago. How did it turn out? What lessons did you learn?
Back in 2003, just after the dotcom bubble burst, it was a difficult time to raise capital for almost any kind of tech startup. One of the few new investments I made that year was in a chip company focused on the consumer electronics industry. The original plan was to develop some core technology, build a great IP portfolio and sell the business. We expected we could accomplish this with a reasonable amount of capital raised primarily from angel investors and maybe a small VC.
Unfortunately, that’s not what happened. The new plan required raising a lot of capital from a big VC and building a fabless chip company with both US and overseas operations. To make a long story short, the company was shut down after spending a lot of investor capital. The VC firm wasn’t willing to keep funding the business and angel investors don’t have the capital reserves to support what was now a capital intensive business.
There were many lessons learned from this investment. The investment was made in the early days of my angel investing career, so I didn’t understand what it meant to bring in a large VC firm that had different priorities over the angel investors. So my key takeaway from this failed investment was to make sure all the investors and the management team are in alignment with the business model and the financing strategy. Without alignment, small investors are in a precarious position.
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