How to Be an Angel Investor: Lessons From 22 Investments

Over the past few years, I’ve chatted with several venture capital fund managers about coming on board as a venture partner (making introductions to potential limited partners, sourcing deal flow, pitching in with selection and due diligence, and mentoring portfolio teams). During these conversations, I realized I haven’t spent much time reflecting on my angel investment practices or even my outcomes.

In other words, I hadn’t bothered to even calculate the rate of return for my portfolio.

In addition, there are many entrepreneurs and others who are thinking about getting started in angel investing right now. I hope seeing a real portfolio, built over a decade, will help others understand what might be expected.

So, I created a spreadsheet to better analyze the actual and predicted performance of all my venture investments.

Updated my @AngelList profile today. I've made over 20 angel or VC investments in startups since I began investing back in 2010. Seen a lot, good and bad. Unbelievably, every startup is either still in business or exited. Best exit ~40x, worst exit ~0.9x.

— Kevin P. Taylor (@ktaylor) April 23, 2021

In this article, I will dissect my 22 angel investments. Then, I’ll highlight a few lessons I’ve learned from the exercise.

My Angel Investment Portfolio

I’m not a full-time investor. I’m a former serial entrepreneur and now a full-time professor. So, I have limited time to spend sourcing deals and managing an angel portfolio.

With that caveat, let’s exam my angel investments. My investing started in 2010, though I made one investment in 2009. That investment was the only “in-kind” investment (an investment of time and services instead of cash) I’ve made.

The table above has a number of columns:

• company name (obfuscated for privacy);
• date of investment;
• percent of my overall angel portfolio the investment represents (in lieu of dollar values, which would be…awkward);
• type of exit I am currently forecasting. This might be “Exited” if the investment provided a return already. Otherwise, it is based on how well I think the investment will do given all I now know (e.g. previous management decisions, up rounds, etc.):
  • Loss: I think the investment be a total loss,
  • Breakeven: I think the investment will return what I paid in,
  • Base Hit: I expect to get a 3x return,
  • Home Run: I expect a 10x return, and
  • Grand Slam: I expect a 25x return;
• exit date is the date the investment paid a return if there was an exit;
• IRR is the internal rate of return, or ie the annual return, over the duration of the investment;
• DPI is distributed to paid-in (DPI) capital ratio, commonly called the return’s “multiple.”

There are some things to note from the above.

• I’ve had four exits out of 22 investments.
• Two of my investments are in venture funds (I.E. I am an LP).
• My largest return was 40.53x my investment (as noted above, this 2009 investment was in-kind services) and it took 5 years to exit.
• My smallest return was 0.95x, or a slight loss, over 6 months.
• I haven’t had any total losses, such as when a company shutters, declares bankruptcy, or recapitalizes.
• My largest investment comprised 16.4% of the total portfolio and it returned a multiple of 1.12 my investment within 13 months. See below.
• My forecast for the remaining companies include:
  • zero home runs (10x returns),
  • five base hits (3x returns),
  • eleven breakevens (1x returns), and
  • two losses (0x returns).

So, those are the metrics for the individual investments. Now, let’s look at the portfolio performance overall.

In the table above, we see that the angel portfolio overall has an actual realized multiple of 10.4. This means that for every dollar I invested, I received back $10.40. Taking into account the duration I held each investment, that results in a 29.6% annualized return.

If my current forecasts regarding the remaining companies are accurate (a big if), the total portfolio will return a 4x multiple or $4.00 per dollar invested. When each company will exit (if they do) is impossible to know and could take another 5+ years.

Lessons on How to be an Angel Investor

Ultimately, I want to know what the above numbers can tell me about my own investment decisions and their impact on my portfolio returns.

The importance of the founder

There is considerable academic research showing the importance of founder attributes in angel investor decisions. Founder personality, background, even physical traits (e.g. age, gender, etc.), or how they present themselves during a pitch (e.g. do they speak in a masculine or feminine manner) have all been shown to impact how angels determine if a founder is backable. Many of these factors are internal biases that investors are not even aware they carry around. These biases can reduce the quality of their investment decisions.

So, as an angel investor, the value of having just a little information about a founder is questionable. It may improve our ability to choose investments or our implicit biases may kick in, causing us to make a poor decision.

My best investment, a 40x return, was in a company I was very familiar with. I knew the founder well and had worked extensively with him for a number of years. He was extremely dedicated to his venture, had a clear and laser-focused vision, and put in tremendous hours. I also watched him build an impressive team and do whatever it took to make progress. This company also did not raise a lot of outside investment, so there was little-to-no dilution.

So, in this case, it appears having much more information about the founder and their progress to date helped me make a great decision. But, my information was much deeper than what I would learn in a pitch or a few phone calls with a founder, where they are likely to put their best foot forward as they court me for an investment.

Scaling risk based on likelihood of success

You’ll notice in the table of investments above that the largest investment I made (16.4 percent of the portfolio) returned 11 percent in about one year. This was intentional. In order to convince myself to risk 16 percent of my portfolio, I had two things in place:

• Previous relationship with the founder (see previous section)
• A strong predetermined plan with the founder to return the money quickly

This particular investment was a “bridge” investment. The company needed a short-term infusion of cash to hit a technology milestone, which would then allow them to raise more equity funding. I negotiated a deal that I would be cashed out when the equity funding took place. This allowed me to derisk my portfolio and pocket some returns.

Examining the investments above, you’ll notice my investments range from less than one percent up to 16 percent of the portfolio. This is because I determine “bet sizes” based on their likelihood of success. So, riskier investments that might also have a very high potential return are smaller. This strategy comes from my days as a semi-professional poker player, where drawing to an inside straight required a very large pot size. But, it also required that the bet size wouldn’t knock me out of a tournament (chip stack management).

Follow-on investments

Finally, it is not obvious from the above list of investments but there are only three follow-on investments. Follow-on investments are subsequent investments one makes in a portfolio company. These usually happen because the company is doing very well and you want to “ride your winners.” They can also sometimes be made when a company has a temporary hiccup and needs an infusion of cash from existing investors, e.g. to bridge to the next funding round or to fix an issue in customer acquisition or customer satisfaction.

Only 13.5% of my investments have been follow ons. I may have better performance if I reserve cash specifically to invest in my winners, a practice of many venture capital firms. This also helps protect the investor from dilution, which is the reduction in your percentage of ownership when a company issues shares to later-round investors.

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Over 10 years I’ve made 22 angel investments. I’m quite happy that all the companies are still in business or have returned some capital through an exit. This poses an interesting question. Have I been aggressive enough in my investment choices? In venture investing, an important caveat is that a company has to eventually either get acquired or IPO.

There are no other ways to get your money back. Dividends are very rare and not tax efficient.

A big risk for angel investors is building a portfolio of zombies — companies that are still in business, have happy customers, but are not growing quickly enough and don’t have strong prospects for an exit. This is a problem because we need to get our capital back so we can reinvest it in the next early-stage startup. Otherwise, we’re out of gunpowder.

I don’t think my portfolio is in this position but it is possible it could devolve to that. Right now I am expecting a 4x multiple on the overall portfolio. This is well inline with the expectations of most venture capital funds, who are happy if they can achieve 3x multiples on their portfolios.

As you can see, there are many factors that affect an investor’s investment decisions and also how they consider the health of their portfolio. I hope this article helped you learn how to be an angel investor