"They say no one gets there alone, and halfway through my career, I can tell you this is the truest thing I know."
Jason Calacanis is a technology entrepreneur, angel investor, and popular podcaster. In Angel: How to Invest in Technology Startups, his seasoned and candid advice provides a wonderful perspective on the world of angel investing. Invaluable investing wisdom is delivered through personal stories and highly actionable steps.
Accredited individuals—known as angel investors—provide investment in the earliest stage of startup companies. Calacanis navigates first time angel investors through relationships, funding and evaluation.
What you will enjoy most about Calacanis’ approach is his no-nonsense way of storytelling. He sorts through the hype and goes directly to the substance of angel investing. Broken down into digestible chapters, Angel provides a solid foundational education to any student or advisor.
Do the Work – Prepare for the Meetings
"Life is short, you should spend your time working with good people, and if you do get screwed, look at it as a small price to pay for getting that person out of your life."
The large risk to an angel investor is the lack of preparation and analysis. Feeling and emotion are part of the job. However, with 90% plus startups failing, it’s a necessity to develop a rhythm and complete the due diligence beyond your gut instinct. Calacanis recommends asking yourself four questions as you meet with prospective startup founders:
- Why has this founder chosen this business?
- How committed is this founder?
- What are this founder’s chances of succeeding in this business—and in life?
- What does winning look like in terms of revenue and my return?
Designed to help you dig deeper, these questions help you understand how this startup aligns with your own goals. Allocate three hours for each startup meeting, including preparation, time with the founders, and completing a post-mortem.
It’s critical to develop the meeting and the pitch down to a fine science. You will meet with so many founders, investors and stakeholders. Getting to the essentials helps to effectively and efficiently make a decision.
Fight for Pro Rata Rights
"Most founders will give their angel investors pro rata rights. If they don’t, something is off. Why wouldn’t you want your early investors to get rewarded?"
A nuance about the angel investing world is the concept of pro rata rights.
As an angel investor, a handful of your startups may continue to raise money in later rounds. During these rounds, your percentage of ownership in the startup can become diluted. To maintain your ownership stake, you will need to make further investment. However, when not requested and defended, you may not have that right.
Pro rata rights preserve the angel’s opportunity to maintain their percentage ownership in future rounds of investment.
Calacanis is adamant about this. He believes the collective angel community should make this a status quo. A good angel investor bears most of the risk, time and network during the inertia of a new company. Don’t they deserve the opportunity to also benefit from the ride?
Before you sign a check, make sure pro rata rights are in place and let it be a warning sign if you’re refused.
Become a Startup Detective
"Groupthink or perhaps even delusional thinking also tends to set in during investing, with people looking around the bargaining table at each other and thinking, 'If nothing is scaring off those other three successful investors, then I’m not worried, either. I’m sure if something was wrong, one of them would have uncovered it.'"
The startup world is dynamic and complex. Calacanis reminds us that we need to couple the need to do the work along with the research. Over a third of the book covers how to become a seasoned investigator through practice and discipline. In one section, he provides five investigative questions, the responses of which will provide insight into the startup, as well as the genuineness and confidence of the founder(s):
- Tell me about the competition.
- How do you make money?
- How much do you charge customers?
- How much does your average customer spend?
- Tell me the top three reasons why this business might fail.
These questions help you ensure that these areas line up. If you see any incongruences, then go deeper or consider walking away.
Calacanis wants you to never assume that other investors have caught everything, regardless of their notability or previous success. In this marketplace, each experienced investor brings a new perspective. These may overlap but, importantly, fill in more gaps.
Startup success is highly dependent on awareness and minimizing being blindsided. Diversity and meaningful diligence raises the bar.
Angel is one of those books that you’ll not only find entertaining, but also hugely informative. It will help you gain a unique perspective into the startup culture and ecosystem.
Throughout the book, Calacanis reminds us over and over that luck is established through forging genuine relationships with others. He even speaks of people who are smarter than he is seeking advice from him. The flipside also very much applies.
What is the strategy mix that will you pursue as an angel investor?