Trace Cohen’s Post

Transcript

Hey everyone I'm back to answer a question I get asked a lot. What is Angel investing? It's really simple. Angel investing 101 is you are startup. I am a high net worth individual accredited investor. Google what that means, 200,000 dollars, $1,000,000 plus net worth, blah blah blah and I give you money and I buy a percentage of your company. Generally it's at friends, family and fools. The earliest round, then angels then precede and seed. This is where I consider Angel investing to be. You can do later stage Series A or B but that's not really Angel investing and the average check is. About $25,000. So we've made about 60 investments into early pre seed seed startups at less than a 10 million valuation. That's the other caveat when it comes to investing is I consider you a professional Angel investor. Not only when you make an investment, writing checks is easy. You want to find a startup, a founder to write a check in. I have hundreds for you. But the professional Angel investor, someone who takes this? Seriously, you do diligence. You have an expertise. You can add value your network of other investors to raise capital. Go to market strategy, hiring, business development, all great value ads. But why do we invest to make money? If I invest in your startup, I'm looking to get back minimum 10 to 20 times my investment back if I give you a check and buy a piece of your. Company early on and I'm only expecting 2, three, 5% times my money back. That's not Angel investing. That is just a normal investment that is private equity. That would be amazing returns for a hedge fund. But I want 100 times my money back. That is really what your expectation should be and that's what VC's expect as well. Every investment you make, if you are a professional Angel or venture capitalist should. Theoretically return your fund. If you have a $10 million fund, you make $100,000 investment. You need 100 X just to return the fund. Yes, there's dilution and other issues, but every single Angel check you invest should expect to make you a lot of money. Now, early on, you can get into the semantics. If it is a priced round, you actually buy equity. If it's a safe standard agreement for future equity, you don't technically own equity until the next round. There's debt, convertible debt. It's not equity. It will convert. It is debt. As it says you will convert into the next round. So also remember as an Angel investor, my job is to make a lot of money. But. Interesting times. I consider myself a scout. I not only try and invest in the best founders, the best ideas, the best companies, if they have traction, I need to also invest in companies that can raise additional capital. That's kind of the little nuance that you'll get a gut feeling over the 1015 years I've been doing this as a founder, operator and investor. Not only do I have to find these cool companies not even cool, some of them are really boring. And that's perfectly fine. You don't have to be the cool hot. OK. We're doing a I sprinkle big data. I just want a company that can be acquired. I am in the investment business, that's what most people think. But actually I'm in the exit business. I only make money when you get acquired or IPO which these days is very difficult and companies were overvalued and they're stacks, lots of issues going on. So I digress back to the initial point, a professional Angel investor which I consider myself as, I've been doing this for 1015 years. And have a portfolio of 60 companies is I meet a founder. They pitched me, they tell me their story, they tell me their product, their attraction, hopefully what their team can accomplish and me hopefully having some knowledge of the industry. I'm not an expert by any means, but I sometimes know just enough to be dangerous or I know the right people and I say OK, mental gymnastics, XYZ carried a 1 / 2. This could actually make a lot of money if it works out. A lot of ifs, Ohh. And if they hit the numbers at their pitching, me, my friends who I've spent all my career meeting at this next stage of the seed and Series A in 12 to 18 months, will they think this is interesting? And has the team achieved the goals that they need to to raise additional capital? How much capital? What's the valuation? Did you raise it too high evaluation? Are you going to need a bridge, basically an extra amount of time? Because you couldn't achieve for whatever reason why half your revenue double your expenses That's what you tell founders. Keep your burn low. Founder LED sales so Angel investing really easy. I want to invest. OK here are the terms I'm raising 500,000 out of 5 million valuation. Great when this is done and the. Wires are signed. All the investors will own 10% of your company. The founders assume there are two. They were 5050, now they're 4545. We'll have an ESOP, an employee, options to apply, stock option pool, usually 10%. They'll be down to 80%, which is fine. 80% of 5 million isn't too bad. And as you grow you'll have a smaller piece of a larger pie. So there's an Angel I know I'm going to get diluted. So if I invest at a 10 million valuation and the company exit for a billion dollars, wow, that is 100 X? Not really, because that was the seed that he went to raise an A probably another 20% dilution. Maybe it be and the C, each of which are another 10 to 30% dilution. So by the time I get from the 10 million to the 1 billion exit, I've probably already been diluted by 40 to 60% depending on what their strength and everything that they've been able to do is. So that 100 X actually is maybe closer to 25 to 40 X, still not angry, that's a great return, but I still need 100 X. This is why we got crazy when they came to valuations. The difference between 1 billion and 5 billion exit. I know billions is a lot of numbers and 12345 is a huge difference. Imagine my 20X getting a 5X from 1 billion to 5 billion. That's huge. That goes from a 20X to 100X. But it only went from 1:00 to 5:00. So once you start getting to bigger numbers, the multiples really jump, which is everyone. Which is why everyone got crazy with unicorns, because the numbers get pretty astronomical. But don't get ahead of yourself. Don't give in to FOMO. If the deal seems too good to be true, it probably is. And if someone says that they can guarantee you a return, just walk away. The best thing about this industry is there's no shortage of founders, no shortage of startup ideas, and there will always be another deal. So take your time, don't FOMO and really try to only invest in the big ideas. I think over the last few years we got away from that. So if you have any questions. Let me know I'm around. Thanks.