David Cummings on Startups

4 Different Angel Investing Strategies

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David Cummings

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Over the past few months I’ve asked a number of angel investors about their experience and strategies when it comes to angel investing. As expected, there are a variety of different approaches and outcomes. Most angels say they’ve made money angel investing, when leads me to believe there’s some survivorship bias as well as returns included from companies they’ve operated.

Here are four of the most common angel investing strategies I’ve encountered:

  • Domain Expertise – looks for startups in a field related to personal background and areas of previous experience
  • Bet on Previous Winners – focuses exclusively on investing in entrepreneurs that have already been successful
  • Small Bets and Double Down – invests the minimum amount in a large number of startups and then invests significantly more in the winners
  • Follow the Leader – takes the lead from another angel investor and follows him/her in investing

I don’t have much experience with this yet but I’m looking forward to learning more and getting a better understanding of each strategy.

What else? What are some other angel investing strategies?

Comments

2 responses to “4 Different Angel Investing Strategies”

  1. Sanford Avatar
    Sanford

    bet on the jockey, not the horse, imo.

    Reply
  2. Dick Reeves Avatar
    Dick Reeves

    David, these are useful strategies for individual angels, but when angels get together and work as a group there are additional strategies possible. In my experience, most companies fail for factors that are outside of their control: 9/11, Sandy, new disruptive competitor, etc. This makes deciding who the winners will be almost impossible on the front side. Instead, most groups of angels recommend that their members rely on a strategy of “invest small and often”. The groups can usually generate enough deal traffic to give the members a diverse portfolio of 10-15 deals over a 3-4 year period, and then they keep the minimum investment by a member down in the $5K to $10K per deal range. The groups usually spend a total of 30-40 man hours of due diligence time per deal, which greatly increases the likelihood of choosing companies that will succeed if the out-of-control factors don’t get them.

    This is perhaps a combination of your “Small Bets and Double Down” and “Follow the Leader” strategies, but the additional capabilities of the group brings a whole new dynamic to the outcomes.

    Reply

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