Shane Currey, angel investor
For founders starting their first business, the involvement of an angel investor can change the way their business does practically overnight.
But what if you’re on the other side of things – if you’re an entrepreneur with some capital who wants to invest in companies yourself?
It may seem as simple as finding a company you believe in and signing a check, but being a good investor, like a good businessman, requires knowledge, experience, and practice.
I recently spoke to an angel investor, Shane Currey, for his top tips for those new to angel investing. Currey is a financial professional with over fifteen years of experience in financial planning, start-up mentoring, and real estate development. The remarkable thing about Currey is that none of his startups have failed, despite having a very diverse portfolio of companies in industries from AI to water.
Here’s what he had to say.
Mentally write off your investment once you have the check written.
Nobody should invest money that they cannot afford to lose.
As a rule, they have no or only minimal liquidity for years, sometimes even longer. If you want to liquidate stakes in a private company, the valuation will almost certainly be reduced to the current FMV (fair market value).
Industry-standard metrics usually indicate that one in seven startups will be successful. I think with the right due diligence and a great team behind the business, you can dramatically increase that result – but regardless, this statistic still needs to be considered. You should also not go all-in at a startup for your allocated capital for such investments. Write smaller checks to more companies and cast a wider net for a potentially high return.
When considering investing in a startup, you should consider the people behind it more carefully than the idea or product itself.
It is the company’s founders and executives who make the concept a reality, increase sales and profits, keep margins in line, and maintain a motivated and capable workforce.
I try to make sure the CEO is ready to check their ego at the door and hand the reins over when the company grows beyond their skill level and expertise.
Many inexperienced investors will fail to realize how much dilution can occur as a company grows from a startup to an eight- or nine-digit company.
When investing, make sure there is adequate treasury for Employee Stock Option Plan (ESOP) and other possible dilutive events on the horizon.
Many investors find themselves in a situation where they invest in a company only to soon see the company expand the common pool of employees or strategic partnerships. This corresponds to a dilution for all existing shareholders. You can isolate yourself by making sure you already have enough of your own stock to be allotted. The number of shares the company owns on a percentage basis may vary depending on the business and its plans.
You should still conduct a comprehensive due diligence on the company.
In addition to the personal due diligence mentioned above, you need to study as many facets of the business, industry, competition, and risk as possible in order to improve your chances of success. You need to look under the hood as many aspects of the business as you can grasp so that you are really comfortable writing the check.
Ultimately, I want to consider my downside risk. While I understand that my investment may be $ 0, in the worst case scenario, I try to consider what someone else would pay for this deal. If the company is currently valued at $ 10 million, but I believe the assets, goodwill, and team are worth $ 4 million in the worst case scenario, my downside risk may be closer to 60% versus 100%.
As an investor, you should be an asset, not a liability.
Often times I see where investors are upset when things are not going in the company’s direction and this is the case several times than not. (Remember, one in seven statistics.)
Instead of inundating the executive team with angry emails or phone calls about things that are not going right, see what you can possibly do to help. What resources can you bring to the table? Which doors can you open What assets are within your reach that you can use to help them? Not only does this protect your investment, but it can also open some doors for you. You may be supporting the company enough that you may be able to negotiate some options or compensations for yourself in order to get your assistance.
Understand the industry before investing
Appropriate research can mitigate the risk associated with angel investments. This means following trends, researching industries and anticipating the next boom. As other investors try to find entry points for crypto and NFT initiatives, I believe that the next market boom will come from the mushroom and mushroom room. As the recreational and prescription marijuana industries have grown in recent years, I believe that the psychedelic and functional fungal spheres will grow next.
When looking for investments, I look at both the history of related industries – like the success of the recreational and prescription marijuana industries – and their continued growth. Although the legalization of the market is imminent, the success of related products suggests that this market will grow as the public becomes more educated about the product.
My newest company is Forage Hyperfoods, a company that supplies functional medicine practitioners with a special type of mushroom. This investment is expected to generate great returns as the market expands and it will enable you to be at the forefront of an emerging industry.
Market research is essential when deciding to be an angel investor and it pays to invest time early to understand the history and future of a particular industry.
Becoming an angel investor can be both a rewarding and risky experience, even if you’ve been into the world of entrepreneurship for a long time. If you learn what you can know about the process in advance, you can look forward to much greater success.