Angel Investing: A Graveyard if You Don’t Know What You’re Doing

If there’s one thing I’ve had (painful) experiences with, its angel investing. I invested in 15 early-stage companies, and guess what? I lost most of my money.

It wasn’t because the product didn’t work or the technologies failed. Typically, the troubles lay in marketing and the difficulty of getting to scale and breaking even.

There’s a saying in the industry that warns: New ventures take twice as long and three times as much as you project.

Well, it even gets worse than that.

Of the ventures I invested in, the one that had the most potential never made a major sale, partially because the customers were municipalities and they tend to be quite corrupt – giving the sale to Billy Bob who butters their bread with all types of free goodies. It’s also because no one wants to be the first to buy from a new company and risk being the fool if something goes wrong.

Another company I made major investments in kept growing rapidly and making progress, but could never get to breakeven because it had to keep upgrading its software. Management underestimated the scale they needed to be profitable.

All too often, companies believe in their products so much that they spend too much on marketing too early on, without diligent testing. They see it as “build it and they’ll come,” but most of the time they don’t, and companies spend too much on marketing too soon. When they do this, they run out of precious and expensive early-stage funding and then have to pay more to get to the next stage, if they get further funding at all.

My point is…

As potentially lucrative and valuable as angel investing can be, there are simply too many things that can go wrong in the early stage that it’s your funeral if you don’t get it right.

So, don’t just jump in without doing your homework, and then doing more homework, and then more still.

And don’t go it alone. Speak to other angel investors, both successful and unsuccessful. Network. Attend our Irrational Economic Summit in October to listen to Howard Lindzon, who’s an angel investing expert extraordinaire.

Until then, here are two summary tips to apply:

• Make sure you’re investing in a management team and not just a product.
• Don’t underestimate the marketing challenges in the early stages, or the funding necessary to get to breakeven and stop bleeding cash.

Don’t become another fallen angel investor. Learn from others’ mistakes and successes.

See you in October.