By guest authors Irina Patterson and Candice Arnold
Anu: The other thing people need to understand is that technology is becoming mainstream. When technology becomes mainstream, you get winners and losers. And what’s happening now is it’s getting harder and harder to be a big Internet player. And, you could say that for biotech, too, where the sales channels and a lot of the regulations of different countries come into play, a lot of that means that the cost it takes to become a big company doesn’t make sense.
You need raise so much money, and there’s so much risk involved, that it’s better just to get bought. And that’s what you see happening for a lot of companies. To scale to the next level requires so much capital that it just doesn’t make sense all the time.
Irina: What are your capital requirements?
Anu: Definitely the lower the better. Maybe a small VC round, but if it’s a huge amount of capital like clean tech or a pharmaceutical deal, they require so much money that there’s a higher chance you’ll get crushed out if something goes wrong. So, deals that are more capital efficient are always better.
Irina: Is there a particularly notable company that came out of Sand Hill?
Anu: There are a bunch of them. A lot of them we invested in early. I don’t think there’s one that I can say now “this is the one.” I speak for my own portfolio, where it’s ModCloth, 3Tera, and Hi5. I’d say, a bunch of them out there are doing very well. It’s going to take a few more years for [Sand Hill] to get to the point of exit.
Irina: What is your biggest personal challenge as an angel investor?
Anu: Time. Time and money. I think you have to have enough dry powder, you know.
With any investor, the way I tell most people is that based on the statistical analysis done by universities, you need to do about 40 deals to get a distribution that matches the average return you see in angel investing.
People claim it’s about 30%, so to do that you need enough money. When you lose money along the way, it takes a while – and nowadays it takes longer – so you have to keep investing every year.
That’s my advice to most angel investors. Decide on a dollar amount, and assume you’re going to invest that same dollar amount for the next 10 years.
Then what the point gets down to is, you’ll have a bunch of failures along the way, but as long as you know you’re going to keep writing checks in the future, you’ll eventually get that distribution you need, and you’ll get the return that matters.
But there’s a big J-curve drop, and a lot of angels, when they get their first bunch of losses, just don’t know what the hell they were doing and feel scared.
Irina: What is the most important thing angels can do to increase their chances of success?
Anu: That’s where a thing like the angel group model works a bit differently. In the LLC, you can invest a small amount of money in lots of different deals the group invests in. So, instead of investing a lot of money into a few deals, I advise most angels to invest a little money in a lot of deals.
Sometimes when you invest a small amount of money, you don’t have a say. But with us, an LLC might be 10 people putting $10,000 in, but it’s $100,000 check, so we have more leverage and more say. So, you get the advantage of the group [power] to not get screwed over later and to have more control and influence.
Irina: Is there any minimum amount that angels put in to the LLC?
Anu: It depends on the deal. For us, we try to put $100,000 into a deal. If there’s not $100,000 worth of interest, it’s not worthwhile for us to create an LLC and do an investment. With us, if the group passes, individual angels can choose to write checks on their own. We do that all the time. I’ve written a check [for a deal]. The group has said no, but I’ve written a check afterward.