Angel Investment Strategies and how these impact deal assessment and deal dynamics
Yesterday we were joined by 404 angel investors in our live session on Angel Investment Strategies and how these impact deal assessment and deal dynamics ⏩ Here’s the core takeaways & full replay.
First, let me make a disclaimer: we only focus on deal evaluation, not startup evaluation and we put a special emphasis on tying evaluation to your investment strategy.
So why focus on deals?
There are many different ways to assess a startup, and the approach you take will vary depending on the vertical. For example, you would assess a biotech startup differently than a fintech startup. However, the deal dynamics around doing an investment are relatively consistent across all verticals.
Why’s it so important to tie deal assessment to investment strategy?
One of the biggest risks in angel investing is getting excited about a deal and deviating from your investment strategy as a consequence. For example, you have been offered an allocation in a deal that Seedcamp is doing and thus you’re seeing there’s strong signal and you love the founders and the space. So of course you wanna put a lot of money into it. However, if your investment strategy tells you to only invest 5k in any one deal, there’s good reason to stick to that 5k, regardless of your conviction. Provided you’ve picked the right strategy of course.
So let’s get into what the right strategy might be.
Two Prototypical Angel Strategies: The Babe Ruth Angel and Average Joe Angel.
Let’s look at the first one.
The Average Joe Angel Strategy
Fixed allocation for a five-year horizon for 30 to 50 investment.
Equal investments across all portfolio companies or Kelly Criterion
Opportunistic (early-) stage investments across various verticals.
No follow-on allocation reserve for selected portfolio companies.
Various fund investments into emerging and established funds.
This strategy implies that you’ll be building a large portfolio that diversifies you across stages, verticals, and geos with a sound mix of direct investments and funds while building a down-side protected portfolio to manage risk-return potential.
Underpinning this approach is of course that all data shows that if you don’t have a very unique access point to the best deals and are a master picker (which tends to take 30+ investments and having navigated the choppy waters of startup investing from start to exit) you wanna make sure you’re very well diversified:
A guest in the webinar asked an interesting question:
Unfortunately, I think Filip is completely right. All too often do we see European angels pursue a far more concentrated approach than historic data would advise. One caveat on this, however, is that we’ve been lagging efficient syndication platforms that allow angels to efficiently build a very diversified approach. Luckily, we’re starting to have these, most notably Vauban and Odin.
Watch the replay in the end of this article for the full discussion of the Average Joe Strategy.
Now let’s turn our attention to the second prototypical angel strategy.
The Babe Ruth Angel Strategy
Concentrated investment portfolio of 15 to 20 companies.
Selected value bets, based on return potential attribution.
Thesis-driven stage / vertical-focused investment strategy.
Follow-on investments into selected portfolio outliers.
Small allocation into stage / vertical-specific emerging funds.
This strategy implies that you’ll be building a laser-sharp network- and experience-based investment strategy yielding a concentrated direct investment portfolio with the potential to return 10x or more, following a power law strategy.
Can you blossom from an Average Joe to a Babe Ruth?
In the webinar, Pedro asked if you can ‘blossom’ from an Average Joe Strategy into a Babe Ruth.
First of all:
I have to take issue with the idea of a hierarchy between the two strategies.
Of course, as an angel getting started, it’s probably not advisable to employ a Babe Ruth Strategy - that takes years of investing, learning and network building to execute successfully. But that does not mean that a diversified approach is inferior and that you should seek to “graduate” even though you can argue that the Average Joe strategy is a “pay to learn” strategy. But never forget:
Some of the very best angel investors are building very diversified portfolios. The most notable likely being Jason Calacanis with 400+ investments.
Though, granted, as an experienced angel there are parts of the Average Joe strategy you’d likely shed, like not doing follow-ons. But the core principle of building a wide portfolio is one of the most powerful angel strategies around.
In the webinar, a guest asked us which strategy we follow 🤔
David put it well describing how we invest at eu.vc:
As angel investors, we have a different approach than most. First and foremost, we recognize that the next great tech success can come from anywhere in Europe, so we want to have exposure to all corners of our beautiful continent.
In doing so, we recognize that we’ll never be able to access and pick pan-European global tech successes on Day-1.
Instead, we believe in investing in early-stage VC funds with whom we collaborate to build strong, long-lasting relationships that we can then leverage to find and bet on their breakout companies.
And doing webinars and content like our pod and newsletter allows us to meet fellow angels that we can co-invest with and build our path with.
In the Average Joe and Babe Ruth-framework, this translates to be a combination of Ultra Diversified at the very early stage (with 4 fund investments we’ve already got exposure to 100+ startups) and a Babe Ruth Strategy at Series A.
Watch the full replay below to learn how to marry investment strategies with deal dynamics and deal assessment starting at 44:33 👀