A SuperAngel’s Investment Guide
February 11, 2011
In recent years I came to realize how much I truly love angel investing: I get to meet tons of young new entrepreneurs, I get to see and hear the newest developments in the market, and I get to participate in the growth of amazing companies!
In a previous post in 2008 I explained that I had fundamentally changed my angel investing strategy. After reviewing both empirical data and from my personal experience of feeling (and being) a lot less rich, I went from investing a lot: $250k to several million, in a few startups, to investing a lot less: $25k to $250k with a $50k average, in a lot of startups.
The change can be seen in the number of angel investments I made:
- 2005: 2 very large investments
- 2006: 4 large investments
- 2007: 1 large investment
- 2008: 7 investments
- 2009: 9 investments
- 2010: 22 investments and 4 follow-on investments (with 5 more investments expected to close in January and February 2011)
It’s not as though I completely adopted the “spray and pray” approach. As I explained in another post, active CEOs are more likely to invest in consumer facing companies, because the due diligence is easier. As Co-CEO of OLX, I have very little time to dedicate to angel investing so I have devised a mechanism to evaluate whether or not to invest in less-than-an-hour, although the “magic” is a bit more complex.
My Angel Investing Method
1. I only look at pitches that I feel capable of evaluating
Given my experience and interests, I only look at consumer facing projects (C2C and B2C) with the following components: marketplaces and/or user generated content (UGC) and/or ecommerce.
If your project falls out of this still relatively large box, I won’t look at it. It’s not that there are no great B2B or semiconductor projects, but I don’t have the time to understand the sales cycle, the competitive dynamics, and the technology, etc.
2. I decide whether to invest or not based on 4 criteria
- Like the team
- Like the pitch: the market size, the business model, etc., basically if the business meets my 9 business selection criteria
- Like the product: yes, I expect the product to be live if only for the founding team to demonstrate its tenacity and capability of executing on a shoe string
- Like the deal: pre-money valuation, liquidation preference, size of the raise…
… then the entrepreneur can literally leave with check in hand (a wire actually). An hour is all it takes.
3. I have a secret weapon: Jose Marin, my amazing angel investing partner
Another large part of the reason the system works so well is that I do all of my angel investing with my good friend and angel investing partner, Jose Marin. Jose was one of the founding partners of Deremate, an eBay clone in Latin America, which was sold to Mercadolibre in 2005. In 1999, I provided the technology and business plan for Deremate from Aucland, my eBay clone for Southern Europe. In the process, I became close friends with its CEO, Alec Oxenford, who is now my partner, co-founder and co-CEO in OLX. I also became friendly with the other founding partners.
In all honesty, I did not take Jose very seriously at first. With his suave Latin style and playboy looks, I never imagined working with him. Not knowing him, I could not imagine he had the mettle to succeed. We lost touch over the years and reconnected in 2008 on one of his trips to New York where he shared his experience with his company, IG Expansion. IG had very successfully partnered with large American companies to take them to Spain, Brazil, and Mexico. He felt that angel investing could be an interesting and synergistic side business to IG Expansion.
We finally made an investment together in 2009 in PeoplePerHour and jointly led the fundraising round for Wikimart.ru, a Rakuten clone for Russia. Upon working with Jose my impression was changed forever. Jose is one of the hardest working, smartest, and most standup guys I have ever met! Working with him has been one of the true pleasures of the last few years.
Not only is he a great source of lead generation for new deals and a great thought partner for investment ideas, but he does all the heavy lifting when it comes to the investment documentation and all the stuff I hate to do! He makes sure the letter of intents (LOIs), stock purchase agreements (SPAs) and the like are perfect. I trust him fully, to the point I never read legal docs. He works directly with my lawyer to draft all the docs. I just make sure the deal points are in line with what was agreed upon with the entrepreneurs.
Jose is really one of the key reasons I can be as prolific an angel. Like with Alec, my co-CEO in OLX, we never formally sat down and spoke about how we would split tasks, we never allocated the angel investing work, we just fell into it based on our interests and what needed to be done. While the work we do as angels overlaps, it broadly breaks down in the following way: we both source new deals and evaluate them, though I am usually the final decision maker on whether we do a deal or not. We jointly agree on the deal terms with the entrepreneur. I send the intros to other angels if need be. Jose takes the lead on closing the deal. I typically help more with product feedback, marketing strategy and VC introductions. Jose actively does status checks with entrepreneurs, flies over to meet them in person and takes the lead on identifying what we could do to help them.
Basically it just works!
4. We often crowd source the due diligence and investment
Reasonably often, we end up leading the angel round with say a $100k investment and raise the remaining amount, typically $500k, though it ranges from $200k to several million, from our angel friends. Jose and I agree to the terms with the entrepreneurs and help them with their deck. We then introduce the team, deck, and terms to our angel friends and ask them if they are interested in participating, and if so, the amount.
Some just tell us they are in for a certain amount without any due diligence. Many, especially early stage funds or VCs who invest at seed stage, organize meetings and calls with the entrepreneurs. In the course of a few weeks, we get to hear the feedback from our network and can assess the demand for the deal. If we can get close to the amount we were looking to raise, we work towards closing the deal, and bridge the entrepreneurs if necessary. If we can’t get close to the amount we were looking to raise, we don’t do the deal.
The angel list now has around 200 names on it segmented by whether they are willing to invest globally or in the US only. As you might suspect, many of the names on the list are also on Angel.co.
Though the above might sound like a lot of work, the reality is that it probably takes less than one hour or two of our time to organize.
5. We use a standard entrepreneur friendly set of terms
We have done so many deals, we now have a basic template. If we are leading the deal, my lawyer takes the lead on the docs, under the supervision of Jose. All of our deals are basically clean deals with a 1x liquidation preference. We don’t do participating preferred, etc. We do expect our parent companies to be Delaware C Corps, or Cyprus holding companies in the case of our Russian investments.
We never invest in convertible loans unless they have a low valuation cap. We feel that the 15-25% discount to the series A they typically offer is not enough compensation for the much greater risk of investing at a very early stage, especially since a series A round is far from guaranteed to happen. If the entrepreneur insists on the convertible structure, we will just wait to invest in the series A.
6. We try to get proprietary deal flow
Jose and I have successfully been doing international idea arbitrage for 12 years in the businesses we run. We apply the same principles to many of the companies we invest in. A large portion of our investments, and our seemingly most successful investments, are localized versions of successful US concepts for Brazil and Russia. Our early success in the region seems to be generating a virtuous circle by which we are known to be good investors in the region and get to see great new deals there which hopefully will in turn be successful.
I will detail our recent investments later, but just to give you a sense of what we invested in (with many more in the pipe):
- Paypal copy
- Expedia copy
- Gilt copy
- Booking.com copy
- Jetsetter copy
- Diapers.com copy
- Rakuten copy
We also invest in clones in Germany alongside Lukasz Gadowski of Team Europe. In those deals, he takes the lead and we co-invest. Recent investments include:
- Grubhub copy
- Yext copy
- Diapers.com copy
- WarbyParker copy (online glasses)
We have not invested much in China as we feel the decks are mostly stacked against non-natives.
I use the word copy for illustration purposes. It does not do justice to the great work the entrepreneurs do at localizing the concept and adapting it for local market conditions. For instance in Russia there is no reliable delivery infrastructure so many companies have to build their own. One of the lessons learned was, you can get a huge productivity increase by removing the passenger seats in your delivery vehicles so your drivers don’t play taxi when they should be doing deliveries…
That is not to say that we only invest in copies of successful US businesses. Around half of our deals are innovative new concepts from around the world, mostly in the US with a few deals in Israel and the UK. We invested in Peopleperhour for instance, due to the vision, clarity of purpose, intelligence, passion of Xenios, its founder and CEO, who is revolutionizing the temporary work space, originally pioneered by elance and odesk.
Our deal flow is varied and comes from many sources:
- Entrepreneurs we have already backed who introduce us to their entrepreneur friends
- Friendly angels and early stage funds such as Oleg Tscheltzoff, Team Europe, and Xavier Niel and Jeremie Berrebi of Kima Ventures
- Friendly VCs, especially DN Capital, Bessemer, General Catalyst, and Repdoint, who share deals that are too early stage for them or deals where we can help
- Stanford Business School (Jose is a GSB grad)
- Our entrepreneur friends
- My blog
1. Quality of time spent helping entrepreneurs matters more than quantity of time
In the early batch of investments where I invested a lot, I typically joined the board, organized regular meetings and was very involved. The reality is that a lot of the time spent in the board meetings and getting reports was not very productive.
An email update or a 5-10 minute phone call once in a while is more than enough to get a sense of how the business is doing. Moreover, rather than having structured times to talk, it’s much better to be available punctually whenever the entrepreneur needs help. This works better for me given it takes less absolute time and is better for the entrepreneur because they get the help they need when they need it. I sometimes don’t talk to an entrepreneur for 6 months or more, but then end up spending a lot of time with them discussing a term sheet they might have received if they are fund raising, etc.
As most entrepreneurs I invest in can attest, I am usually very reactive and can give instant feedback on the product or make introductions to someone in my network.
This setup has definitely worked better for me and I believe that it has not decreased the quality of the help for the entrepreneurs, but I will let them comment on that directly.
2. Stick to your investment principles
I occasionally invested in companies that did not meet my 9 business selection criteria. I always had a great reason to do it, but it invariably did not end well. For instance in 2005 I invested $300k in Phanfare. I LOVED (and still love) both Andrew, the founder, and the product. It’s the best way to upload and manage photos and videos. They keep the originals forever and have amazing iPad and iPhone apps.
Despite loving the product and the team, I knew that the market for a premium photo and video hosting site was small given the free alternatives from Facebook, Youtube and others. I knew that this was not a $1 billion revenue opportunity and would at best be a sub-$100 million business. However, I decided to follow my heart and made the investment.
What I realized over the years is that it’s just as hard to build a small business as to build a big one, so you might as well try to build a big one. As an angel, you might as well invest in big ideas. Through sheer grit and tenacity, Andrew has made Phanfare profitable and sustainable, but its niche nature made it a poor investment.
3. Diversity is good
Sometimes companies fail despite having good entrepreneurs, good products and being in seemingly large businesses. Some business end up being bad businesses because competitors give away your product for free or consumers prove reluctant to pay for something they really should pay for.
A few reports I read on angel investing suggest that angels with less than 7 investments lose money and those with more than 7 make money. In fact the more investments you have, the higher your IRR because it increased your chances in being in the real hits like Facebook, Google, Youtube, or Skype.
In my particular case, I am glad that I had enough diversity in the portfolio to withstand the investment losses on all of my storage investments: Phanfare, Allmydata, and Badongo.
4. It pays to be lucky
As I had previously reported, I had been extremely lucky with my first batch of investments from 2000 and 2001. I had made 7 investments. If you had asked me in 2002, how much the 7 companies were worth, I would have told you they were worthless, in fact one of them, Alidoo, a Pets.com for France, had gone under.
Somehow, over the course of the next 6 years 5 of the remaining 6 investments did incredibly well despite, or maybe because :), there was no involvement whatsoever on my part. One of them, MilleMercis, an online marketing company went public and turned my 76k euro investment in March 2001 into 1.16 million euros when I exited in March 2006. Four of the other five investments made money, albeit with lower returns than the MilleMercis deal: 2xmoinscher (half.com of France), Cityvox (a Yelp of France), Kangaroo Village (an incubator) and Webhelp (an online call center). The only exception was Demerate (an eBay of Latin America) where the liquidation preferences took all the proceeds of the exit.
Even my recent 2010 success might be attributed to luck as the startup scene has become extremely heated and Brazil is super-hot right now.
5. Exits can take a long time
VCs typically have a 4-5 year time horizon given their fund life. Given that angels invest before VCs we need to realize that many of our investments won’t be liquid for 6 or 7 years if not more. That duration has increased over the past few years as companies now need to be larger and more profitable to go public.
By way of example, I invested in Cityvox, a Yelp-type site for France, in January 2000, but only successfully exited when it was sold to Orange in March 2008, over 8 years later!
As such it’s very important to invest money you can afford to lose and will absolutely not need under any circumstance. I mentally write off all investments the minute I make them such as to be pleasantly surprised if something comes of them.
6. Most exits are below $30 million
Even though Facebook, Zynga, Groupon, Skype or Youtube come to mind when we think of successful startups, there are less than 5 startup exits per year with a valuation above $1 billion. In fact, the vast majority of exits are below $100 million and most of those are below $30 million. Excluding Zingy and OLX, the companies I ran, only one of my angel exits had a valuation above $40 million (MilleMercis). You can still get great returns, but you must be mindful of the valuations you invest at. It’s also a good idea to steer your startups against raising too much money unless the opportunity is really huge and the entrepreneur really wants to go big.
Performance to Date
I originally did very well with my 1999-2001 investments. My three large storage investments (2 in 2005 and one in 2007) were unmitigated disasters and essentially written off. Fortunately most of my other investments are actually doing rather well.
2010 was a year for the record books! Financially, it’s my second best year ever after 2004, the year I sold Zingy.
I sold 5 companies in 2010, one more at the start of 2011 and have a term sheet for one more. Another company also almost sold, but the buyer backed out at the 25th hour after we (the sellers) had signed the stock purchase agreement! I invested in 22 companies and made 4 follow on investments in companies I had previously invested in. I also committed to invest in 5 more companies. Those investments should close in January and February 2011.
The companies I sold were:
- Allmydata (to its management)
- Labpixies (to Google)
- Contextin (to Spark)
- BrandsClub Mexico (to BrandsClub Brazil)
- Dineromail (to Naspers)
- OLX (to Naspers)
If you exclude the companies I actively ran (Aucland, Zingy, and OLX), Dineromail is my best investment to date as $300,000 invested in February 2006 became $4.69 million in February 2011.
In 2010 invested in:
- January 2010: Captalis, Spanish lead generation company
- January 2010: Martingale, hobbies marketplace
- February 2010: Fisker Automotive, electric car company
- April 2010: Assured Labor, job site for unskilled labor in emerging markets
- May 2010: AppsFire, mobile app recommendation engine
- August 2010: MeetMoi, mobile geolocalized dating site
- August 2010: Follow on investment in Rate it All!
- June 2010: Autrement (HotelHotel), Tripadvisor for France
- June 2010: Follow on investment in Martingale
- July 2010: Follow on investment in Peopleperhour, a freelance marketplace
- October 2010: WiseStamp, social email signatures
- October 2010: Hipway, Jetsetter for Russia
- October 2010: Viajanet, Expedia for Brazil
- October 2010: Follow on investment in Sonico
- November 2010: digitale-seiten.de, Yext.com for Germany
- November 2010: HealthVillage, WebMD for the world
- November 2010: Groupit, group gifting payment solution
- November 2010: Oktogo, Booking.com for Russia
- November 2010: Babyboom, Diapers.com for Russia
- November 2010: Betterment, a better way to manage your investments
- November 2010: Windeln, Diapers.com for Germany
- December 2010: EcoMom, high-end Diapers.com
- December 2010: MobileSpinach, local mobile cash
- December 2010: Lieferheld.de, Grubhub.com for Germany
- December 2010: Buildabrand, an online branding system
- December 2010: Usingmiles, a miles management solution
Since I started angel investing and excluding the companies I ran, I have invested in 55 companies of which I still have 43 investments active. The angel exits I have had so far have paid for all 55 investments including disasters like Allmydata. In other words, I am break-even with 43 investments still active a few of which look very promising including Viajanet, Wikimart, Brightroll and PeoplePerHour.
We’ll see what 2011 has in store for me from an angel investing perspective. Regardless, I am looking forward to meeting great entrepreneurs and hearing fantastic new ideas!