Advice From Debra Fine, CEO of Fine Line Accelerator

- May 1, 2020


You can benefit from these eight Angel Investing strategies to get a leg up on other investors in today's economy. I invest with Tech Coast Angels and here are tips from their Chairman Emeritus, John Harbison. - Debra Fine

  • 1

    Stay in the Game

    The public equity portfolio is way down. But, most likely, you aren't bailing out while the stock market is down. Same is true of Angel investing.

    Stay in the game. Keep reviewing companies, meeting with entrepreneurs, and be prepared to invest in some of your existing companies and some new ones too.

  • 2

    Be Highly Selective

    Most Angel investors are always selective. But this is the time to turn your filter even higher.

    Funding is even more limited than it was a few weeks ago. There will be lots of great opportunities, both in your existing portfolio and new ones.

    So, take your time and invest with care. The funding requests will vastly exceed your ability to invest!

  • 3

    Work in a Group or Team

    Angel groups (or groups of Angels) can help a lot, both in terms of assessing deals and in making sure that there is a sufficient pool of capital and expertise to help companies succeed and thrive.

    In stressful times like these, this is even more important. The Alliance of Angels has survived the 2000 (dot com crash) and 2008 (mortgage crisis) downturns, with a group IRR of over 20%.

    Angels and the startups they support can really benefit from that institutional wisdom.

  • 4

    Be Ruthless

    All Angels investors have their favorite companies. We want them to succeed. This is the time to step back and realistically consider the probability of success with limited financing.

    Advise your existing companies to conserve cash and focus on how to help their customers.

    You may think you are helping by keeping a portfolio company alive. But make sure that their plan is reasonable to actually survive - tough love. Some of your portfolio companies will not survive - even great companies will die from running out of cash and runway.

    But it is likely that some good ones will come through this crisis even stronger and give a better return than you expected.

  • 5

    Avoid Multiple Financing Rounds

    This is a time to avoid companies whose plans require multiple rounds of financing with large cash needs before they can turn cash-flow positive.

    I'm not saying to sub-optimize the outcome of great companies. But for at least quite a while, it is likely that cash will be tight, and it will be difficult to raise money.

    Companies that are frugal and can make the most out of the Angel cash have a much higher probability of giving you a return.

  • 6

    Deal Terms Matter

    This is a time for resets. Both Angels and entrepreneurs need to reset expectations.

    The world will recover, but it is likely to take a while, so make sure that the terms on which you invest are in sync with the market and the projected future.

    Resetting valuations to match today's reality is a must. If you agree on a valuation that is too high, the company will have trouble both attracting enough investment now and, particularly, more investment at the high post-money valuation later.

    Watch for other terms, like liquidation preferences, that can lower your return. And, for a less experienced CEO, do not be afraid to have some protective provisions, e.g., the company can't exceed its budget without the approval of the investors or investors' rep.

  • 7

    Be Careful, But Not Greedy

    As Angel investors, we invest for the future and to give back.

    It is OK to be careful, ensuring that the return you get is commensurate with the now higher risk you are taking. But don't be greedy and ask for large multiple liquidation preferences, too much of the company, or asking the entrepreneur to throw all their energy into the company without retaining a big enough stake. This is a time when we want a "rising tide to raise all ships." We are in this together.

  • 8

    Exits

    In the short term, not many exits are likely to occur. Unlike VCs, Angels can do well with modest exit valuations (provided that the initial valuation was in line with reality).

    Entrepreneurs can also do well with a modest exit. Make sure the entrepreneurs in which you invest are on the same page - look for early exits, even if they are more modest. You want entrepreneurs who want to be rich, rather than becoming a king!

We are in a challenging period. It is natural to want to pull back. As an Angel Investor, this can be a good time to both maximize your current portfolio and find some new fantastic deals with fantastic teams at reasonable terms.