Angel Investing is all about getting in early.
Startup funding isn’t a linear process; it’s milestone-based. That means a company can jump in value, or fall behind, seemingly overnight.
The key to getting the maximum payout on our investments is to get in on deals before they’ve gained too much traction. A crowded playing field is a profit-killer.
There are multiple funding stages at which we can invest… but a good rule of thumb is, “the earlier, the better.”
Since each round – or “raise” – is larger than the last, your $1,000 investment will buy more equity in the first round than it will in the third.
In the very beginning, a startup is worth much less than an established company.
Consider this example: you find a startup with a great idea and a winning team.
You decide to get in really early – before the company has any revenue. That company is worth fifty thousand dollars; it has assets and potential, but not much of a track record.
Your thousand bucks equates to a two percent stake in that company. That number may get diluted a bit in later rounds, but that’s okay. Maybe you come out at the end around one percent.
But if you waited and got in on a later round – say, when the company was worth $5 million… your thousand dollars would be worth much, much less – 0.0002 percent, before dilution.
Same investment amount… 5,000 times less equity.
Suffice it to say that timing is key here.
That’s why you’ll want to familiarize yourself with the different stages of startup funding.
Here’s an example of a typical timeline, from “founded” to “funded.”
Let’s dig a little deeper into what happens during each funding round.
1. Idea Stage
2. Friends and Family Round
3. Seed Round
4. Series A
5. Series B, C, D, etc.
6. Initial Public Offering (IPO)
On average, it takes about 10 years for a company to make it to the final stage – but fewer than 1 percent of startups ever get that far. Acquisitions, mergers, and failures can happen at any time.
Some investments take much longer than ten years to pan out. American Express was in business for 127 years before it went public!
At the other extreme is Netscape, which had its multibillion-dollar IPO in 1995, just 16 months after its conception.
Pretty much any scenario is possible, but the average time to exit is three and a half years.
The earlier you invest, the higher your returns are likely to be.
The vast majority of your investments will take place during the seed round, but some startups do seek angel investments in other phases.
Any time you consider making a deal, take note of where your money will fall on the timeline.
It could mean the difference between a decent return… and an eye-popping, life-changing, epic win.
Until next time,
P.S. My team put together this top-level table for you – print it out, hang it on your monitor, whatever you need to do. But keep it handy!