Mysty Rusk is founder of San Diego Angel Conference and Executive Director of the Knauss School of Business’ Free Enterprise Institute.
Something happens in the process when you collaboratively have the right people and objectives in place as an angel investor. At some point for the people in the room there is a realization that the next generation of business leaders is there right in front of us and that there’s ways to help them succeed. It’s not just about money for most.
One survey finds that while about half of angel investors rate the potential for returns as their top motivator for investing, about a third also rank solving some of the world’s biggest challenges as another.
Experienced angel investors realize the importance of a good network, diversification of their portfolio, quick and thoughtful due diligence, and getting to know the team. Even then, there may be no way to foresee a global crisis, a stealth competitor, or other risks that are completely outside the startup’s control. But some obstacles are avoidable with the right knowledge. I have over 20 years experience, I’ve reviewed about 4,500 deals working closely with others in this industry, and founded one of the largest angel conferences. These are the seven most valuable lessons I’ve learned.
1. Signing an NDA.
I signed a couple of non disclosure agreements early on. As a novice investor, I didn’t see the harm.
What I quickly learned is that most NDAs are sweeping and cover things you wouldn’t expect. They also prevent you from doing good diligence or sharing deals with other investors.
When I get serious about a deal, I often talk with my colleagues and others for input or to better understand some aspect of it. Like most investors, I don’t write huge checks, so I lean on my network to assemble other investors around the deal. An NDA prevents me from doing that. Early in a conversation with a founder I don’t need to know highly confidential information that an NDA protects. If I get far enough into due diligence and it becomes important to the deal to know the more confidential aspects — like software code, methodology, or a unique sales process — I will work with a founder to identify a third party we both agree on to sign an NDA, evaluate confidential components, and report findings to me so I can make a more informed decision.
2. Too many eggs in one basket.
A lot of us make this mistake early on: We invest too much money on one of our first deals. We look at a few deals and decide, for whatever reason, to invest a big chunk of our budget into one deal. If you spread the money around (investing in a member-managed fund for example) you can learn a lot about different industries and stages while you build up your network of other investors.
3. Not paying attention to the ones that sound too ‘out there.’
Yep, an early mistake I made was paying too much attention to the product and not enough to other aspects of the deal. A device that mimics kidney function and miniature nuclear reactors that snap together like Legos both seemed like pie-in-the-sky ideas that I passed on when I first started out.