5 Healthy Investment Habits We Can Learn from VCs and Angel Investors
Investing your hard-earned cash for a stake in a company can be exhilarating.
The moment you decide to set aside a portion of your income for a company, you’re excited about all the possibilities it offers.
I started investing in companies through the public stock market way before there was ever a thing called investment apps like Robinhood.
I had gotten to a point where I was living in excess. I also could have decided to keep the extra cash with my bank and earn variable interest rates, and then I thought.
What the hell?
Why don’t I put it to good use and make it work for me?
And just like that, I thought to myself: I should invest my extra cash into something that would bring even more.
Don’t get me wrong, I made some bad investment choices in the early days. So I had to learn from my mistakes when it comes to putting my hard-earned money behind someone else.
Angel investors invest in early-stage companies. They invest in startups that haven’t reached profitability yet. This means their investment strategy is riskier than the traditional public market offering, but the returns are impressive.
Most of them created a startup, made money from it, invested in other companies, and succeeded. They can teach us a lot about good investment etiquette. Like how we can start making good investment decisions because they have a higher ability to evaluate risk factors, profitability, and everything in between.
Here are the lessons we can learn from them:
1. Not every business is a good investment opportunity
Joanne Wilson, an angel investor, has invested in women-founded companies for over a decade.
She explains how she evaluates every investment opportunity and then pre-selects the one that gives a higher return.
“I want to own at least 1% from the get-go and that has become much harder in the past few years as valuations have soared beyond prices that angels can actually make money on their investment. Unless of course, you are willing to put in a big check from the get-go. I won’t do that”, says Joanne.
So, like Joanne, you should know that not all investment opportunities are created equal. A couple of things you need to keep in mind are:
The profit share of your investment
How profitable the company is.
The size of the market.
If the company is not worth your time, it’s best to find one that operates within a huge market and offers a big cheque.
2. Make Sure Your Goals are Aligned with that of the company.
Investing is not just about racking up profits in the long term. It’s also about putting your trust in someone you genuinely believe in. Most VCs and Angel investors focus on industries and business models they’re either:
Passionate about, or
Have experience in the sector
That’s because investments are risky and the stock market could crash. So, finding a company you share the same goals with will create a sort of trust and familiarity. This will help you make a good investment choice and also get bigger cheques.
3. You have to trust the other person to make decisions on your behalf
VCs and angel investors always say they don’t invest in companies, they invest in people.
Joanne Wilson adds: “The founder is first and foremost, the opportunity is second, price of the deal is third”.
Pejman Nozad, the founding partner of Pear VC says: “I look for founders who have a long-term vision instead of just a short-term goal.
Are they focused on getting rich quickly? Or are they focused on making users happy, creating jobs, building a long-lasting company, and changing an entire industry? Founders shouldn’t bite off more than they can chew but they do need to look beyond the next big payday and think about what kind of future they want to build. That’s how real change happens”.
Even if you invest just so you can make more, be sure to know that as soon as you write that cheque, you are putting your complete trust in the person you are investing in. You can share your thoughts and recommendations, depending on the size of your share in the company.
But even so, you cannot run the company for maximum efficiency. That is the founder’s job.
The lesson here is to do your research to find the best and strongest founders of the company you’re trying to make an investment with. Once you find a winner, you know that your investment is in good hands and it becomes more likely you’ll get a higher ROI on your investments.
4. You Don’t Have to Go Big on Investing
This is especially true when you’re just starting out.
Most VCs and angel investors invest a small amount in early to later-stage startups. Then they save the rest for a follow-up investment, just in case the company becomes a grand slam and needs more funding to scale aggressively.
We can use this strategy to our own advantage as well. Stock prices could go down. When this happens, your shares are now very valueless. This means that you just lost your investment.
So make sure to invest a small amount at the beginning. If it pans out and you’re earning a huge return on your investment, it would make sense to invest more to increase the size of your profitable portfolio.
If it doesn’t on the other hand, you’re free to invest what you have left with a better company, which would have been drained down the pipe if you invested all of it.
5. If you have zero due diligence yourself, invest with others who can
It makes a huge difference investing alongside people you trust — friends, family, or industry peers.
As a newbie, you don’t know what you’re doing because you have no experience. So you would need someone with investment expertise to show you the way. They will assess the risks and uncover the potential of your investment opportunities.
Newer VCs with little to no experience in the investment space use a strong network and community of experienced individuals, usually through virtual or live summits to learn and master their craft.
A good example of this is my good friend Niklas Anzinger. He is just getting started in venture capitalism and is currently the founder of a startup city VC where he uses live summits to meet experienced individuals that would help him learn how to identify good investment opportunities.
Much like this one - Infinita Fund
These summits organized by newer VCs tend to attract other VCs, angel investors, and startup founders across several industries. Then, they organize workshops and contests for startup founders to see who has the strongest and most viable business idea. The winner gets to pitch to the attendees — VCs and angel investors to fund their new business idea.
So the VC just getting started now has a better idea of how to best identify good investment opportunities.
You could do the same.
Find an angel investor or friend with investment expertise and a focus on a target industry. Email them or call them and ask them if they can discuss how they best identify high-potential investment opportunities.
Something like: Hey, if you had a thousand dollars in cash and a list of 3 companies like Slack, Salesforce, and Google, which one would you invest your money with, and why?
Let them know it’s important. It works well on someone you don’t know but greatly admire, and you feel there might be some friction with your request. Tell them you’re reaching out because of their expertise.
Trust me, they will appreciate this.