A Primer on Angel Investing for Entrepreneurs

I was too… many times.

And in today’s newsletter, I’m going to tell you about:

• Some of the investments I’ve made
• What happened
• My 3 rules for investing
• And why you almost certainly SHOULDN’T write that cheque

Not yet, anyway.

I’m by no means the most experienced investor out there, but I have invested multiple six-figures of my own money into other companies, and have some pretty clear opinions on the matter.

I’ve also had to talk down quite a few friends and mentees from the proverbial ledge.

Investing in a business isn’t like playing the ponies - you can’t just pick a pretty name and pray.

A shrewd operator weighs all the angles before laying their money down.

And so I thought it’d be worthwhile to lay out my own take on angel investing.

A little friendly advice to mull over before betting the farm on any particular outfit.

Let’s go…

Why Invest? (It’s Not What You Think)

So let’s start by asking the most basic question, why invest in the first place?

This is where I think people often fall at the first hurdle.

People think that investing is a way to get rich, but that’s the wrong way to think about it.

Investing is a way to keep your money once you’ve made it.

Now, as a business owner, you already have a vehicle for creating wealth – it’s your business.

You’re in control and you call the shots.

Your primary business is always going to be the best way for you to actually make money.

So use your business to make the money… and then invest it wisely to keep and grow it.

Why not invest your cash to make even more cash?

It’s because of the small matter of risk.

Risk

Most investments will fail.

The overwhelming majority.

It’s as simple as that.

Professional angel investors will invest in 100 startups with the expectation of only ONE of them succeeding big time.

That one big success then makes up for the loss of the 99 others.

Let’s be honest…

With them odds, it’s on the same spectrum as gambling.

Or, to put it another way…

Once you’ve earned your money in your main business, are you really going to risk it all by going hard on those odds?

If even the most experienced angel investors in the world lose 90%+ of their bets, you’ll be a very brave soul to think that the investment you’re about to make is going to be a dead cert.

For this reason, it’s smart to work on the assumption that any money you invest in other companies… you will lose.

As a rule of thumb, never invest more than 10% of your net worth in angel investments, or any other high-risk category for that matter. (Think crypto.)

Even the pros only invest what they can afford to lose.

In 2016, I invested £1,000 in a restaurant start-up that ended up going bust during Covid.

Fortunately, that’s a loss that didn’t keep me up at night.

A big lesson learned cheaply – things can outright fail.

So, if you’re about to go out on a limb, think long and hard about it.

With all this said, let’s talk about opportunity cost.

Opportunity Cost

If you’ve ever been faced with an investment opportunity, you’ll know that it sits on your mind as you weigh up the pros and cons.

Let’s say that you go ahead with the investment…

At best, it will continue to occupy significant head space.

At worst, you’ll be fielding calls from the founders or even firefighting when things go wrong.

So, the really important thing here is to understand that getting involved in other businesses comes with:

The huge opportunity cost of not focusing on your main business!

That’s right.

Angel investing isn’t just a financial calculation…

If you’re distracted from your main business, you’re de-facto stunting your ability to generate wealth in the first place.

Losing focus is one of the cardinal sins of growing a new business, and investing is a guaranteed one-way ticket to exactly that.

For this reason, it only makes sense to consider investing once your primary business:

• makes 7+ figures in AR
• runs largely without you

Before that, it’s like denying milk to a child.

And for that matter, I would also avoid doing any investing before you have at least $1m of surplus cash in the business.

I once put £10,000 into an augmented-reality home furnishing app, long before I was in a financial position where that made sense.

The company is still around, as far as I know. But there’s no hint of seeing any return on that.

As far as I am concerned, it’s dead money.

If I’d just put that money in an index tracker, it would be worth £15,000 now. (Always gotta consider the boring alternative!)

So it’s effectively a £15,000 loss.

I feel that.

That might sound arbitrary, but see earlier comments on using investing to keep wealth rather than create it.

My Personal Investment Rules

As you experience investing, it’s vital to develop a comprehensive investment thesis or set of rules that govern when you will and won’t invest.

This will take time to develop, and probably a few failures too, but once formed, it will act as a shorthand to stop you making stupid decisions in the future.

Here are my three rules for investing.

I use these whenever evaluating any opportunity that comes my way, whether it’s be a friend, stranger, or my cat who’s proposing the deal:

1. I must bring an unfair advantage
2. It must be on the right side of a trend
3. I must have deep faith in the founders

Let’s look at these one by one.

Firstly, an unfair advantage is some existing knowledge, skill or asset that you can use to help give the company an advantage they wouldn’t otherwise have.

For example, when I made a large investment in a tutoring company, it was with deep familiarity with the education space and the ability to send customers from my main business.

This allowed me to assess the opportunity on more than just “the numbers”.

I had influence and insight.

I could put my fingers on the scale.

That business has now cut over 6-figures in dividend cheques and is on track to repay the initial investment, even before any talk of exit.

Second, the idiot in a rising market will do better than the genius in a declining one.

Think how much easier it is to make money in AI, for example, than newspaper publishing.

So, given the choice, you may as well just take the opportunities that are on the way up.

For example, when I invested in a coaching SAAS platform, it was with the knowledge that the coaching industry is like a steam train, multiplying faster than rabbits on Viagra.

It’s simply a good place to be.

That business is now raising their 4th round of investment and is on track for their planned 9-figure exit.

Thirdly, betting on the founders is one of the biggest lessons of all.

Starting any kind of business requires an incredible amount of tenacity and determination.

Many businesses have no right to succeed… but the founder just wills success to happen, finding a way to make it work against all the odds.

This quality is not just a “nice to have”, it’s essential.

StoryLearning took 10+ years of pure determination and tenacity to build, while many competitors just fell by the wayside.

I look for the same thing in someone I invest in.

It makes it far easier to make the investment because I just have faith that they’ll make it work.

When I invested 6-figures into an ambitious B2B media company, it was purely because I knew the highly-experienced founder was going to go “all in” on it.

It boiled down to a calculation of, this guy, knowing him as I do, will he make a success of it, come what may?

The answer was a resounding Yes, and so I went in.

This was a case of effectively backing the founder over the business…

Which might sound risky…

But with the other two rules in place, it makes for a strong combo.

So, those are my three rules.

In all my investments that failed, I realise that I’ve only followed 0 or 1 of the golden rules.

By contrast, my investments that have succeeded followed all three rules and are doing great.

Funny, that.

And those rules – they’re your lifeline when the full moon fever takes hold and you’re ready to throw it all away on some half-baked scheme that doesn’t add up.

It’s that one thread of reason you can cling to when the world’s gone sideways and nothing makes a lick of sense anymore…

Pulling yourself back from the brink, right at the last minute.

So, whatever your rules are…

Have them.

Conclusion

Well, there you have it, friends - my primer on angel investing for entrepreneurs.

Here’s the gist of it:

• I’ve made some investments, and they’ve had mixed results
• You don’t invest to make money, you invest to keep your money
• Most investments fail, so only invest what you can afford to lose
• Investing takes time and focus away from your primary business
• If you do invest, start small, invest in what you know, and develop your own rules

My personal investment rules are:

1. Bring an unfair advantage to the deal
2. Be on the right side of a rising trend
3. Bet on founders I have deep faith in

So, before you sign that cheque, think long and hard about whether it’s the right move for you.

Most of the time, it probably isn’t - at least not yet.

Focus on your own business first, and consider investing later down the line.

The opportunities will still be there.

Until next time,
Olly