It’s no secret that we’re living through unprecedented times right now. Every time you turn on the television, someone is talking about the COVID-19 pandemic, a looming recession, and a global crisis. It’s pretty unsettling, and quite frankly, downright scary at times.
If you’re feeling unsure about where or how to invest your money right now – or if you even should – I don’t blame you. It’s clear that overall economic trends are anything but predictable these days, and we all want to do everything we can to hang on to our well-earned income and assets. The markets will recover eventually, of course… but this early in the game, it’s practically impossible to predict when that’ll happen.
In short, there are plenty of reasons to feel nervous. Today, however, I’m here to explain why you shouldn’t panic right now. Yes, things are shaky and uncertain – but as a potential startup investor, you’re in a unique position. Market pullbacks and recessions often create extraordinarily favorable conditions for startup investing, which means that you can still see massive returns on your investments.
But to pick the right deals, you need to have a plan… which is exactly why I’m here. My mission is to guide you towards the most lucrative opportunities and to teach you all of the strategies you’ll need to make investment decisions with confidence.
Below, I’ve compiled some of my top tips for getting the most out of your investments during today’s global crisis.
Let’s get started with the basics…
Tip #1: Understand the Basics
Now more than ever, it’s crucial to understand the basics of angel investing before you even dip your toes in the water. Those who take the time to understand what they’re getting into will find the most success and see the biggest returns in their investments – and that’s true all the time, not just now.
What’s most important to remember is that angel investing, even today, is one of the best ways to make money. If you’re still not sure what an angel investor is exactly, let me explain:
An angel investor is a person who provides that first, crucial investment – also known as a seed investment – that a fledgling business needs in order to grow. Angel investors see the potential of big ideas and claim an early stake in that idea’s potential success in the future.
But what’s unique about angel investing is that all of this happens way before anyone on the public markets can ever get their hands on company shares. As an angel, you’re investing in a company before it hits the public market, which means that you’re getting in on the ground floor before most investors.
This puts you in a considerably unique spot. You’re not only getting to claim a stake of a company during its early stages – you’re also setting yourself up for a greater chance of financial gain in the future. Think about it… you’re investing in a company before anyone who opted to wait for an IPO. You’ve been there from the start – when the company was worth much less – which means that you’ll potentially see a way bigger return on your investment over time.
You’ll also be well-positioned to exit, or make a return, right as everyone else is coming in… taking those massive returns with you.
But in my opinion, the best part about angel investing is that you’re not just there to make money and leave. As an angel investor, you have a real opportunity to make a significant impact on a company’s development.
If you invest in a seed-stage startup, you’re showing the company’s founders that you believe in their business idea and that you want to help. Those founders can rely on you for direction and advice, and you can have a part in influencing how the company grows.
But, as with everything, you need to think realistically. Here are some things you should know before you invest a single penny.
Tip #2: Expect Volatility
I’d be outright lying to you if I said that there were no risks involved in startup investing. There are inherent risks involved in any type of investing; if there were no risk, there’d be no reward. That’s why most angel investors hedge their bets, spreading out their capital among 10 or more startups, rather than going all in on one.
Still, there’s a unique set of circumstances you should be aware of in the wake of the coronavirus pandemic. As recently as a couple of months ago, no one could have imagined that the global economy would be experiencing such a rapid downturn now. But it’s important to realize that this was all happening way before COVID-19 became a part of our daily vocabulary.
The public markets had already been slowing down for a little while. We’ve seen companies like Airbnb and Palantir Technologies decide to hold off on going public after seeing their competitors take hits in the market. And while the angel investing world usually isn’t extremely concerned with price fluctuations once a company IPOs, there are some ways that this market downturn is affecting the life cycle of a private startup.
In particular, harsher economic conditions could tie up venture capitalist dollars… meaning that there may be less cash in the market for smaller startups looking to get off the ground. Even though angels tend to invest in seed rounds, as opposed to Series A and beyond, fewer companies may make it to their Series A round at all if they can’t guarantee VC investment. This could spell trouble for seed-round investments that will disappear if a company loses traction before advancing to Series A.
Now, on the flip side, startups tend to be better equipped to adapt and succeed within volatile market conditions than big companies. Startups are smaller and more agile, so they require less in terms of overhead and manufacturing costs. They can move quickly in times like this, because they generally need less runway than their corporate competitors on the public markets.
Where publicly traded companies might see the most financial strain, startups may, in fact, be less affected overall. But it’s still important to go beyond your gut instinct and do your proper due diligence. Here’s why.
Tip #3: Do Your Due Diligence
Let’s face it: There’s no shortage of good ideas out there. And that’s pretty exciting… but it can be hard to separate the wheat from the chaff.
You need to know what to look for before you ever invest even one dollar so that you’re not just jumping headfirst into every deal opportunity you see.
I’ve already mentioned how easy it is to get caught up in how incredible a startup’s big idea is… but that doesn’t always mean the idea will work out in the long run. One of the most important pieces of advice I can give you, especially now, is to always approach your investment decisions with an analytical, data-driven eye.
Millions of startups launch around the world every year, and there is no possible way that all will succeed. However, with the right tools and knowledge about what exactly you should be looking for, you can make well-educated decisions about where to put your money and rely on more than just your gut instinct to see those returns.
Personally, I choose to invest in startups with a big total addressable market (TAM). This means that this company operates within a huge market – in the billions of dollars at least.
Take biotechnology for example. Biotech is a booming industry that’s slated to hit almost $730 billion in just five years. Imagine investing in a company that grows to occupy just 1% of that market. That’s huge – 1% of a $730 billion market is still $7.3 billion… and all of it belongs to that startup.
A company that’s already making some money is a good sign too. It doesn’t have to be a huge amount of money either. But if a startup can show me that they’re capable of marketing and selling a product, that’s a measurable indication of its future success.
The companies with the greatest success tend to be those with scalable business models. This means that they can easily handle an increase in market demands without necessarily increasing their overhead costs too much.
You should also invest in companies whose founders have a big vision that you understand and believe in. And last but not least… you should never invest in a company without taking a closer look at the deal terms.
More on that later – for now, let’s talk more about founders…
Tip #4: Find Founders You Believe In
One of my favorite sayings is “back the jockey, not the horse.” But when so many founders claim to be presenting the world’s “next big thing,” how can you tell which are worth your investment? Especially today, it’s important to not only invest in passionate founders, but in founders who can weather this economic storm and come out with a stronger company on the other end.
In fact, some of the world’s most successful companies were born during economic recessions. The Great Recession of 2008 and 2009 saw some of the most innovative ideas grow into unicorns – and beyond – today.
Think about companies like Dropbox, Glassdoor, Uber, Slack, and Square. We all know these as some of the world’s biggest and most successful companies, but they were just getting started during the Great Recession.
Personally, one of my favorites is the story of Airbnb. The company grew from just a few guys trying to pay their rent in 2007 – arguably one of the most difficult periods in recent history to launch and run a business – to a multibillion-dollar decacorn in 2020. In just 13 years, that company achieved exponential growth due in no small part to the grit of its three founders.
In the earliest days of their company, when they were strapped for cash, Airbnb’s founders sold repurposed cereal boxes as “Obama-O’s” and “Cap’n McCains” at the 2008 Democratic National Convention, a silly but innovative move that earned them $30,000. Fast-forward to today, and Airbnb is worth over $31 billion.
In the economic uncertainty COVID-19 has caused, it’s more important than ever to seek out founders who will do whatever it takes to make their idea a tangible reality… even if their methods are a bit unconventional.
When it comes to the paperwork, though, my advice is to keep it as simple and straightforward as you can.
Tip #5: Double-Check Those Deal Terms… Then Check Them Again
I’m going to take a wild guess that you probably don’t want to put your money into a company that’s not going to succeed. It’s common sense – I know.
And while startup investments can be risky, no matter how potentially successful they look at the beginning, it’s important to double-check (and triple-check) everything about the company before you invest a dime. There are a few critical reasons why.
First, the most successful startups will adjust their deal terms to better serve their investors during times like these. People are naturally going to be more resistant to invest these days, and these startups have recognized that they have to be a little bit more realistic about their funding goals if they want to convince people to hand over any amount of money.
Most likely, this means that many startups will begin to raise cash at lower valuations… which means less-expensive buy-ins for you. A company that’s asking for a high or unrealistic amount of funding might be a company to steer clear of for now.
Second, being more vigilant about your investments now is great practice for the rest of your life as an angel investor. This economic crisis won’t last forever, but the skills you take from it will last you a lifetime.
It’s just up to you to figure out where to invest your money.
Tip #6: Invest in the Basics
Being stuck in quarantine has posed a unique set of challenges for absolutely everyone. We’ve gone without the same everyday services that we’d grown accustomed to in the past, and adapting to this “new normal” has been quite isolating at times.
But even without the same access to things like office workplaces, restaurants, bars, malls, schools, and grocery stores, life still has to go on. In fact, many companies are capitalizing on this by adapting their business models to reach their customers in new ways right at home.
When you’re thinking about what types of companies to bet on these days, ask yourself what types of services and items you need while you’re sitting at home. These are the companies that are seeing the most success in the coronavirus economy.
Maybe you need to communicate more efficiently with your coworkers from home, or maybe your kids need to attend daily classes online. Companies like Zoom and Slack make this a breeze.
Maybe you want to limit your grocery store trips by having your groceries delivered to your home. Or maybe you want to plan a date night using food and drink delivery services to bring food from your favorite places straight to your front door. You’ll probably use apps like DoorDash, Drizly, Instacart, or UberEats.
What do all of these companies have in common?
They are the ones providing services and products that people want and need while they’re stuck at home. And they’re the ones that are thriving today.
But it goes beyond just grocery delivery and online meetings… there are so many startups out there that are taking steps to create tangible solutions to real-world problems faced by countless people. I’m seeing startups in fields like medtech, ecommerce, and even cannabis tech that are continuing to thrive.
The most important takeaway here is to invest in startups that solve real problems – and those problems can range anywhere from needing a few bits and pieces from the store to needing more sophisticated and effective medical procedures… and everything in between.
Because startups that solve problems are the ones that’ll make it through tough conditions – and you’re going to need them to stick around long enough to grow.
Tip #7: Stay in It for the Long Haul
It’s easy to get discouraged when you don’t see a quick turnaround on your investments. Likewise, it’s easy to feel like you want to back out of investing altogether because you’re wary about losing your investment.
These are both valid concerns, and I understand where you’re coming from. But the angel investing timeline makes these worries a little less daunting, because angel investing is a long-term commitment.
When you invest in a seed-stage startup, you’re betting on a company that’s just taking its first steps.
What this means for you is that any investment you make right now is likely to take up to 10 years to see a return… and by the time that happens, the economic impacts of COVID-19 could be far in the rearview.
We’ve been in the midst of this global crisis for several months now, and we’ve all seen the massive immediate impacts it has had on our economy. But it will pass eventually. Things will go back to normal.
If you’re planning on investing in a startup now, this should come as good news to you. By the time your portfolio company reaches maturity – and potentially IPOs – this economic downturn should be well over.
And if you’ve already invested in a startup this year, the funds you’ve given will contribute to the company’s long-term runway.
So don’t fret. Instead, focusing on developing the best tools to discern which startups are worth your money. And what better way to do that than to follow the leaders?
Tip #8: Follow in the Footsteps of Seasoned Angels
One of the best ways to pick up a new skill is to follow in the footsteps of those who came before you.
This goes for everything – think about it. When you were a kid playing a new sport for the first time, did you just pick up the skills and immediately understand what to do by yourself? Chances are, you didn’t. You probably had a talented and experienced coach to help develop your skills, until one day you found that you could do it all by yourself.
Think of angel investing as your new sport… and us as your willing coaches. That’s the beauty of angel investing – it really is a community, and we’re here to build each other up.
It’s also important to rely on successful angel investors and founders to give you the most accurate information on how best to proceed during economic crises like we’re seeing today.
For example, I recently sat down with one of my friends and the founder of Business Insights Group, Cameron Chell, to discuss how startups and investors should position themselves to weather the current market conditions. We talked about everything from what entrepreneurs and investors should – or shouldn’t – do to sectors where we’re seeing the most – and least – success.
It was an incredible conversation, and you can access a rebroadcast by clicking here.
It’s so common to get caught up in the dream of making it big that it can be easy to lose sight of where you should be focusing your time, effort, and money. That’s why it’s so crucial to listen to those who made it before you and to learn everything you can along the way.
Tip #9: Learn Everything You Can
I’m a big fan of lifelong learning, and as with everything, one of the best ways to develop a skill is to consistently position yourself to get the best information possible.
The same goes for angel investing. We’ve already discussed following in the footsteps of already-successful angel investors, but there’s so much that you can do on your own to enhance your skills as well.
To start, you can follow along with myself, my colleague David Weisburd, and the research team here at The Startup Investor. You’ll receive a twice-weekly free newsletter highlighting the best of the startup world and filling you in on everything you need to know to see the biggest return possible on your investments.
You can also visit The Startup Investoronline to access tons of videos, articles, and other information about how to develop your angel investing skills. My team and I have worked hard to provide you with the best information possible so that you can stay ahead of the game and learn everything venture capitalists don’t want you to know.
The more you know about angel investing, the better prepared you’ll be to make the most lucrative investment decision possible during today’s shaky economic times. And the better prepared you are, the less likely you’ll be to panic when the world seems to have screeched to a halt.
Tip #10: Don’t Panic
This is easier said than done, but I really do mean it. With the right tools, we’re going to get through this together and come out stronger on the other side.
I truly believe that it’s within a startup’s nature to weather a storm like this one – and those that do will make it to the other side leaner and stronger than before.
Keep up with us, and I’ll show you how it’s done.
Until next time,
Neil Patel
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