Tuesday, September 27, 2022

How To Angel Invest

Our investor coach today is Gale Wilkinson, the Managing Partner at Vitalize VC - an early-stage venture capital fund that invests in the “future of work.” Gale has experience leading over 190 investments and runs a $16M Fund with 300+ angel investors in her investment community.

Gale Wilkinson

Founding Partner at Vitalize VC

Hey, Hey!

In this week's issue, I want to give you an angel investing playbook.

Investing in startups is like the wild west of investing. It’s risky but also one of the highest returning asset classes.

The good news is that this market is more accessible than ever if you know where to look.

The challenge is angel investing is a long-term game, and most people don’t have a long-term plan. 

Let’s put a stop to that!

The Angel Investing Playbook

Here’s what you’ll walk away with today:

  • How To Identify $1B Investment Opportunities
  • The Tactical 5-Year Angel Investing Playbook
  • How To Build Real Wealth By Investing In Startups
  • Where Unacreddited Investors Can Source Angel Investments

Our investor coach today is Gale Wilkinson, the Managing Partner at Vitalize VC - an early-stage venture capital fund that invests in the “future of work.”

Gale has experience leading over 190 investments and runs a $16M Fund with 300+ angel investors in her investment community.

Make sure to follow her on Twitter at @GaleForceVC.

Let’s get after it!

Guest: Gale Wilkinson, Managing Partner at Vitalize VC 

Social: @GaleForceVC

Video Length: 52 Minutes

Gale runs Vitalize.vc, an early-stage, $16M fund and 400-member angel investing community with a founder-friendly approach. Alongside a tremendous investing track record, Gale has built one of the country's first unaccredited investor networks - unlocking VC-grade investment opportunities to the unaccredited community.

  • 2005 - 2010: Fortune 500 Consulting: Gale consulted for fortune 500 brands on market entry strategies, product positioning, and price point optimization and worked for companies like Neilson and Orbitz.
  • 2010 - 2021: Building An Angel Network & Investing $50M+: After wrapping up her MBA at the University of Chicago, Gale founded IrishAngels, an angel network of 230+ investors affiliated with Notre Dame that invests in early-stage opportunities. She led investments in 80 companies, deploying $50M in capital.
  • 2021 - Today: Growing Vitalize VC: In 2021, Gale founded VITALIZE, a fund & angel community investing in software focused on transformative, data-driven work technologies. They invest $50-150K at pre-seed & $250-750K at the seed stage. 

The best investors in the world have a strict set of criteria they look for when investing into startups. It’s a critical tool in their toolkit. When you see thousands of investment opportunities each year, you need a strategy to shrink the universe to 5-10 investments. 

Today, we’ll share Gale's investment criteria, but to make it tangible, we’ll use an example of a company she invested in at the Seed stage (earliest stage) called Player.ai - now a $1B+ company. 

What is Placer.ai? 

Have you ever seen some poor soul at the mall with a hand clicker counting the number of people meandering around the food court? 

It looks like this.

Well, someone is paying that person minimum wage to try and approximate the foot traffic. A very analog approach to a very lucrative data problem. Placer turns that hand clicker into a multi-dimensional platform.

How? They leverage anonymized location data from millions of mobile phones and use their platform to turn that random data into intelligence about the foot traffic and trends. 

So now it looks something like this…

Placer also analyzes “dwell time” (a fancy way of how long someone loiters around trying to make a buying decision). It is particularly useful in commercial real estate, where landlords can use the data to determine the best cross-tenant placement. This is a win-win for both the landlord and the tenant as it results in higher-performing businesses at the location.

Because Placer made this data actionable and easily accessible (just sign up to their platform), they were able to grow quickly and close 1,000+ customers – from large retailers like Wegmans and BJ’s, to real estate developers like Tishman Speyer.

They have raised $192M in venture financing and are worth over $1B+. 

Here’s The Checklist Gale Use To Make This Investment: 

  • Can They Build It? The team in any startup is critical. A great startup idea means nothing if the right operator isn’t in place. 

Gale likes to determine if they have a long-term mindset. She asked the Placer CEO, “How do you plan to execute your vision over the next 5-10 years with the current market data and customer base.” Some founders can be long on vision but short on an actionable plan. Placer’s leadership was strong on these questions. 

The Placer CEO had already built and sold a data company and spent years in the Israeli Defense Forces leading a Data Science team…needless to say. There was “founder fit.” 

  • Can They Grow It? Placer's head of business development also had solid prior experience, having helped a previous business grow to $100 million in revenue. 
  • Do Customers Want it? Not only was revenue growing quickly, but Gale could see that there was the beginning of product-market fit. Normally it takes until Series A or B rounds to make that kind of call. Comfortably doing that in a seed round, with the resultant terms and valuation for investing, was another factor that made backing Placer a solid call. 

Here’s the 5-step playbook to getting started with angel investing based on Gale's experience investing in over 190 deals and working with hundreds of angel investors. 

First, Why Angel Invest?

There are a few great reasons: 

  • Diversify Your Portfolio: Angel investing is an excellent way to diversify your portfolio with 
  • Potential tax savings: If the start-up qualifies and you hold your position for longer than 5 years, it is possible to pay no tax on the gains. 
  • Build The Future You Believe In: You also get to help founders build the future you believe in.

Step 1: How Much Should You Invest?

Let’s say you earn $150,000 per year, and after taxes and expenses, you have $50,000 per year remaining to invest.

You decide you have enough in the public markets and real estate, so you’re comfortable investing 50% of that investable cash into startups - $25,000.

What’s important here is not the end number you get to. It’s determining a safe number you can commit to each year for the next 5 years.

Only invest money that you’d feel comfortable lighting on fire. It’s money you do not need to survive.

Your goal is to invest in 25 companies over 5 years. Only a few of your bets will pay off, so you want to employ classic portfolio theory by diversifying your holdings to optimize risk-adjusted returns. 

Starting early and pacing is the key. You want to have enough periods to reinvest your gains back into venture capital. If there is a 10-12 year cycle, there aren’t many opportunities to be in the game. Make an investment plan you feel comfortable with and stick with it.  

Step 2: Where Should People Source Opportunities?

Now that you’ve decided how much you can comfortably invest each year and how many startups you should invest in let’s explore investing directly or investing in a fund.

If you have under $25,000 a year to invest, you will most likely be looking at direct investing, given most funds won’t take amounts smaller than that.

Good places to look for startup investments include: 

  • Vitalize Angels <https://vitalize.vc/vitalizeangels/> - This is Gales investing syndicate for unaccredited investors. It’s a great way to access this market if you do not meet accredited investor regulations.
  • AngelList Venture <https://www.angellist.com/> - You can invest in both funds and directly into companies via syndicates. You can find investors you like and invest directly into the deals they source. However, you do have to be an accredited investor to participate.
  • Crowdfunding Portals: There are several crowdfunding platforms out there, such as WeFunder and Republic, that allow unaccredited investors to participate. It's important to note that these companies are not investors in the startups, so they do not do the same diligence that someone like Gale would do before sharing an investment opportunity with unaccredited investors. 

 

Next, figure out what you care about. There are simply too many opportunities to sort through without some beginning criteria. 

Create a decision matrix to run potential deals with factors like specific industries that you believe in (i.e., fintech, Enterprise SaaS, etc.), Geography, or funding stage, to name a few.

Once you have figured this all out, start focusing on becoming part of different communities, expanding your network, and simply putting it out there that you are an angel investor. 

Also, use the concept of reciprocity in your favor. When deals come your way that are not a good fit for you, that does not mean that they aren’t an amazing fit for someone else. Start sending deals to people in your network, and you can expect people will send you deals in return.

Remember, Angel Groups and Syndicates can provide all the deal flow you need. 

Step 3: How To Diligence A Startup? Initially, you can get your sea legs on how to judge a deal by learning through books, articles, and even social media. Join 2-3 angel groups to get the deal flow just to see how the process works.

Built a set of investment criteria:

  • Is this a big market? For startups to get big, they need bit markets. Make sure there are enough potential customers for them to sell to.
  • Is this the right team? Is this team the best suited for the job? Have they worked in this industry before? Have they built big companies before?
  • Do customers want it? Make sure the startup solves a problem customers are willing to pay for. It’s very common that startups are solving a problem, but maybe not one that a customer is willing to pay a lot of money for.

These are 3 good rules of thumb, but do your research and add more to this list! For example, I only invest in companies with revenue of $100,000 per year or more. 

Step 4: Shoot For 30x Returns

Why is swinging for the fences important? Because the power law of startup investing says that 80% of the returns will come from 20% of your deals. This means that when you get a winner, you want the possibility of a big return on your investment. In that situation, you don’t have to be right as often. Do everything you can to put the odds in your favor.  Only pick businesses with huge potential upsides.

Step 5: Mistakes to avoid

Angel investing is risky, but here are some common mistakes you should be mindful of:

  • Herd Mentality: Sometimes, there can be a herd mentality in angel investing, aka all the cool kids are investing in the new helicopter pet delivery grooming service. Do not invest in a deal you don’t love because of FOMO. Stick to your thesis. There isn’t always safety in numbers.
  • Mind the cap table: If too much company ownership is in the wrong hands early, this can lead to financing risk down the road. You want to shoot to invest at the pre-seed or seed phase so that the founders still own between 60%-80% of the business after each round. 
  • Be Mindful of Valuations: You do not want to invest in a company if early valuations are too high. This may seem counterintuitive, but a high valuation can make it difficult for a founder to raise additional funding down the road, which can doom a company due to being under-capitalized. Early-stage company valuations change all the time, which is why it's important that you get consistent exposure.
  • Are They Spendy? Watch for founders burning cash too quickly. You want to make sure the company has at least 18-24 months of runway. Beware of founders buying ergonomic office chairs for everyone—red flag.
  • Do not expect to be involved in the business. Unless you have a specific relevant skill set and are asked for help, it is more likely your helpful branding suggestions will be viewed as interfering with the founders.  The best way to help is to provide introductions to customers or connections that can directly impact the health of the start-up. 

Gale has a very specific, long-term strategy she is using to build wealth. And that plan is never to stop investing in startups. 

Gale has enormous exposure to the startup markets, with most of her income and long-term wealth opportunities coming from her venture funds and syndicates. 

Gale plans to continually commit to larger investments and diversify further within this asset class. In the near term, that means investing in more startups directly or via her growing VC fund. Over time, Gale plans to write larger commitments to other funds and support other investment managers to get broader exposure.

Her primary wealth-building vehicles are: 

  • Startup Investing: 
  • Vitalize Venture Capital: This is a $16M fund and investment syndicate. The fund uses a 2% and 20% investment model, meaning 2% of the $16M they collect each year in fees ($320,000 per year) and 20% of any profits from an eventual sale of the businesses they invest in.
  • Personal Angel Investing: Gale invests personally into ~5 companies per year with check sizes ranging from $5,000 to $10,000. 
  • Irish Angels: An angel investing syndicate she built and managed for 9 years. Gale led investments in 80 companies, deploying $50M in capital. The business model was a syndication model, meaning 20% of any profits from the sale of these companies would go to Gale and her team.
  • Real Estate - Gale owns her home, plus One-Condo, and does not view this as her primary wealth generation tool. One solid tip Gale lives by is always keeping her housing costs lower than her peers. This allows her to invest the difference into vehicles that will provide a return for her long term. She has no plans to expand her real estate portfolio and does have a condo that is a rental property that she is looking to sell if anyone is buying!
  • Public Equities - Gale has a wealth manager who controls her public equities but has no further plans to put any more money into the market.

I hope this got you thinking. See you next week!