Investing Strategies and Portfolio Construction - A Primer into how Experienced Angel Investors Make Decisions

Aspiring and newer angel investors often ask for the best strategies for angel investing, as well as how to make a great ROI. With this idea in mind, Citrine Angels held a panel discussion on Investment Strategies and Portfolio Construction, featuring experts from Blu Ventures, Angel Capital Association and New Dominion Angels.

One of the exciting aspects of angel investing is that investors make decisions themselves. Decisions can be rational, emotionally driven based on what resonates, or both. From a rational standpoint, one of the most important parts of evaluating an opportunity, according to the panelists, is learning as much as you can about the “5 Ts”: Team, Technology, Terms, Total Addressable Market, and Traction - Blu’s signature evaluation guidework.

Team

A cohesive team with complementary skills and a shared vision is invaluable, particularly during high-pressure scenarios. A solid team will have the know-how and the skill set to bring their product or service to market successfully. They will be able to communicate openly and honestly with potential investors, including about funding to date, improvements that need to be made to the product, and a proposed timeline to its exit. A good team is also self-aware of its strengths and limitations, with an open mind toward criticism and mentoring.

Technology

The team should be able to explain the technology they use (both their product and their company infrastructure) in a way that entices investors. A solid opportunity will leave no questions about the product or service it brings to the consumer, including its scalability, defensibility, and competitive advantage. This is the point at which it’s helpful to evaluate the product’s uniqueness and efficacy as well.

Terms

The terms of every angel investment are different, and it’s important to be meticulous in your evaluation of the structure of each deal. Looking at the company’s cap table can add invaluable insight into the terms of the deal (i.e., SAFE notes, equity, and convertible debt). Are they pulling in checks of significant size under the terms of the deal? Who are their investors? Are previous investors reinvesting? What conditions govern the relationship between the company and its investors? Good communication with the company is crucial at this juncture; if the team is cagey or uncertain of its terms, that could signal an issue with the deal.

Total Addressable Market (TAM)

The TAM will help you understand the potential growth of the product. How big is the market? Is it diluted or is ripe for disruption? Does the product solve a customer pain point? One panelist noted: “can I find people who will tell me this company is solving one of their three biggest problems, and they will pay to have that problem solved?”

Traction

Traction can vary based on the lifecycle of the company, but ultimately the panelists agreed setting goals and meeting milestones is most important. It’s essential that the company has stated milestones and has tracked their progress in achieving them. For many companies, this means revenue. That said, different industries have unique markers for traction, too. For example, a medical-related company receiving FDA approvals would be a significant milestone.

Red Flags

Every investor has a different tolerance for risk, for specific industries, and for certain types of projections. Learning your limits is a critical part of developing your portfolio. Good communication can both alert to and resolve red flags. 

Some red flags will strongly signal a poor investment, including stagnant cap tables and investors sitting idle, a team that lacks coachability and accountability, a company that continually pivots its purpose, and communication that is not succinct or articulate. 

Final Thoughts

Developing your portfolio is a constant work in progress – all of our panelists are growing and changing their strategies as they gain more and more expertise. In the end, your investment decisions rely on your own unique blend of analytical acumen and intuition. All agreed they typically make a modest investment initially to buy time to better gauge the company and understand the market, the company and overall situation. Then, they decide if they want to double down and continue investing. 

Participating in an angel investing group and otherwise involving yourself in the investment ecosystem can often be invaluable. With angel investing groups, you get to borrow the knowledge of your peers and leverage the expertise of your fellow angel investors. We do this all the time at Citrine, and it allows us to make informed decisions about startups across a variety of industries.

And finally, it’s important to recognize angel investing means participating in a long game. It can take 5-12 years for an exit to occur. And many startups fail. But, every so often, you hit a jackpot, and that taste of success is extremely satisfying.

We thank Mary E. McLaughlin, Kim Nguyen, Nicole Washington and Joe Carlin for sharing their expertise.