Angel investing can be an exciting journey, but it’s not without its pitfalls. Recently, I made an angel investment in a direct-to-consumer wine subscription startup. Unfortunately, just one week later, I received an email announcing the company’s impending closure if they couldn’t secure additional funding. This company has now failed and the founders have not been responding to my emails. It was a harsh lesson, and I’m sharing the five mistakes I made to help you avoid a similar experience.
- Set a Funding Deadline
In my eagerness to invest in this company, I wired the investment directly to the founders’ bank account after conducting my due diligence and signing the contract. However, a few weeks later I learnt of a great strategy that a speaker at a Playfair Capital talk shared: they only send funds once the founders raise the entire funding round and the speaker usually sets a deadline by which they are willing to send the funds. If this is not the case they don’t invest. In hindsight, this approach would have protected my investment better and this is something I will be implementing in the future.
- Thorough Due Diligence is a Must
I thought I had done a comprehensive job with due diligence, but when I didn’t hear from the founders, later research revealed red flags. For instance, the company had closed its first limited company and started a new one. This restructuring should have raised questions but because I didn’t dig deep enough into the detail I missed it. I have learnt from this oversight that technical DD does not just include industry knowledge experience but also important aspects such as legal structures.
- Don’t Let Emotions Guide Your Decisions
I am very passionate about wine and when I saw this investment opportunity I was inherently biased about the company. However, loving a product doesn’t guarantee a successful business. It’s crucial to set emotions aside when angel investing and focus on the business’ fundamentals. If I had put my emotions aside maybe I would have paid better attention to the business strategy, metrics and growth.
- Invest Only What You Can Afford to Lose
Thankfully, I adhered to this rule. Since I learnt only a week after my investment that the company is pretty much-going bust, I deeply understand the meaning of this important rule. Don’t ever invest money that is critical for your day-to-day such as rent, food, clothes etc.. Only invest money that you can afford to lose since a company can go bust much quicker than you expect.
- Co-Invest with Others
The founders cold emailed me and since I had no mutual connections with the founder, when the time came and I needed information or visibility this was very difficult to attain. I believe in the value of cold introductions, emails and calls, but there are clear advantages to investing alongside others or in founders whom you might have shared connections with. Co-investing can facilitate communication, information sharing, and mutual learning. This is something critical especially as you are learning and growing as an angel investor.
In the end, this experience taught me valuable lessons about what to improve, what to avoid, and what to look out for when investing in founders. Mistakes are the best teachers, and these lessons will undoubtedly make me a more diligent and experienced angel investor.
Let us know about your experiences and lessons in the comments! We all learn and grow from our investing journey, and your insights could benefit others in the angel investing community!
This essay was written by Katharina Wodenitscharow, a member of the AIS community and angel investor.