3 tips for building a startup investment portfolio

My friend Josh Maher (@joshmaher) is a prolific angel investor, President of Seattle Angel, and author of the new book STARTUP WEALTH: How the Best Angel Investors Make Money in Startups. STARTUP WEALTH delivers engaging interviews with early-stage investors in Google, Invisalign, ZipCar, Uber, Twilio, Localytics, and other successful and not so successful companies. It outlines how an amazing IPO can result in early investors getting pennies on the dollar—or a 10x+ return. I asked Josh to write this guest post sharing some of the key insights from the book. You can learn even more about it here. Here’s Josh:

Six years into Shark Tank, three years into the JOBS Act, and we’re seeing a record number of investors adding early stage investments to their portfolio. Building an early stage portfolio is easier and easier with software such as DreamFunded, AngelList, and OurCrowd reducing the friction to finding and investing all over the world. This is good and bad news for entrepreneurs. Free flowing capital without the connections, advice, and mentorship that usually accompanies early stage investment can put a company at a competitive disadvantage against other new entrants.

After interviewing over 50 of the best angel investors in the country for my new book Startup Wealth: How The Best Angel Investors Make Money In Startups, I found three themes repeated over and over again that investors looking to build a portfolio of early stage investments shouldn’t ignore.

  1. Decide if it’s a full or part time commitment. Deciding this up front is critical, you’ll easily get wrapped up in an investment that needs a full time commitment and you may be un-prepared to offer the assistance they need to succeed. Here’s what John Ives (@jives), founder of Boulder Angels and Tahoma Ventures advises, “I would make sure that that person makes a conscious decision between is this a hobby or is this your career.” This sentiment is further clarified by this quote from Jim Connor (@jconnor_sha), member of the Sand Hill Angels, CEO of First Focus Learning Systems, and Producer/Host of the talk show Game Changers Silicon Valley“… as an angel investor, you have to decide if you totally want to be a passive investor. Maybe you give advice, you help out, you do some mentoring but that’s all you can do because you’re in a lot of companies and you have limits on your time. You can easily get your time fully consumed.”
  2. Are you a trend spotter or hidden value finder? Figuring out if you’re great at spotting the next trend isn’t necessarily easy. Would you have picked the iPhone, WhatsApp, or Fitbit? Or would you have been more comfortable making an investment in the next healthcare device with the possibility of becoming the standard of care? Chris Sheehan (@c_sheehan), past director of Boston’s CommonAngels, currently Sr Director, Delivery at Applause advises, “Find your own comfort zone of the style of angel investing that you want to do.” Digging a little deeper, Bob Bozeman of Eastlake Ventures and early investor in OpenTable and PayPal: “…this idea of vision investing versus metrics investing, if you’re really more comfortable with metrics investing then don’t do angel investing. The early stage really isn’t going to be good for you and you’re going to be driving the entrepreneurs for all the wrong reasons. They don’t have metrics until they’re well into their business. A pure metrics investor should try to participate more in A rounds, or something like that, or syndicate behind people that are vision investors.”
  3. Start slow and proceed with caution. Investing too quickly is the easiest mistake to make, writing big checks or just writing too many checks is easy to do when you start seeing the amazing ideas being brought into the world by so many incredibly capable people. It takes more than ideas and people though and learning how you prefer to invest takes time. Christopher Mirabile (@cmirabile) is the co-Managing Director of LaunchPad Venture Group and cofounder of Seraf counsels, “…one mistake that you see a lot of times is people tend to write a little bit too big of a check in their first couple of deals. What I’m trying to say is ‘Don’t be impulsive. Being quick and decisive is necessary but be thorough too – don’t be impulsive.’” This sentiment is repeated over and over again, Chris Sheehan states, “I would just be a little cautious about really rapid pace of investment.” Matt Dunbar, managing director of the Upstate Carolina Angel Network chimes in with, “You got to be patient. You can’t go into these things expecting to get your money out next year.” Rudy Gadre, partner at Founders Co-op agrees, “Try to minimize the impact of mistakes. If you’re worth 5 million dollars, don’t make your first check 1 million dollars. Try 25 thousand dollars or something like that. Start learning about what can go wrong.”

Whether you’re thinking about adding early stage investments to your portfolio or have already begun, these three tips will help you build a portfolio of companies that you can be happy with over the long run. You need to decide if this is a full or part time commitment, if you’re a trend spotter or better at finding hidden value, and you should start slow, proceed with caution, and discover the pace that you can comfortably invest every year for the rest of your life.

If you like this post, you might also enjoy How to raise money from angel investors.