Angel investing is an attractive use of time for a multitude of reasons. 1. Your personal risk tolerance determines the downside, but the potential upside is uncapped. 2. It gives you great exposure to a vast array of ideas, businesses and industries that result in a more well-rounded perspective. 3. It gives you exposure to other intelligent and opportunistic individuals who see the value in creating reciprocal relationships. 4. You can have a hand in creating the world as you wish it would be. By backing companies you believe in, you increase their chance of survival.
There are many ways to make money, but very few that result in non-linear returns. When an individual successfully creates personal wealth, they have typically done so in one of three ways. 1. They created a company that subsequently got acquired or reached an initial public offering (IPO) 2. They were a .01% performer in a desirable skill or expertise that created enough scarcity for their talents that they could charge disproportionately large sums for their time or work. 3. They allocated capital in assets early enough that subsequent growth resulted in huge multiples on their investment. While Angel investing is focused primarily on the third of these three, it also encompasses identifying companies (1) and entrepreneurs (2) with greater odds of achieving favourable outcomes.
A syndicate is a group of individuals who collectively invest in companies in return for equity. The syndicate lead (me) is responsible for finding deals to offer the syndicate members, otherwise known as LPs or Limited Partners. There is 0 obligation to invest in any company.
Syndicates offer three primary benefits.
Access to deals - Many investors would not otherwise have access to early-stage investments if they were not part of a syndicate.
Lower bar to entry - Because multiple people are investing simultaneously, it means you can invest as little as $1000.
Network & learning - Being part of a syndicate gives you exposure to high-level discussions about the merits and trajectory of businesses which is valuable in all areas of life.
No, it is completely free to join the Syndicate. However, there is an industry-standard 20% carry on any positive returns
To legally invest in private companies, aspiring investors first have to meet one of two preconditions to be considered an accredited investor.
1. You earn over $200,000 per year and have done so for at least two years and expect to do the same this year.
2. You have a liquidn et worth of over $1million.
Note: There is no need to apply for official certification, but those who try to invest without meeting the preconditions above may face legal consequences if discovered.
Yes. But not to invest money.
If you are not currently able to meet the preconditions of an accredited investor but are still interested in offering your services in return for equity (aka sweat equity), still apply here and check the box that best reflects your current position.
Often startups are looking for talented professionals, and I separate out this cohort to offer opportunities that don't require accredited investor status.
I maintain high standards so that founders feel comfortable working with me.
I don't have to know every member personally but I do like to know that the people in my Syndicate are a value add. What is a value add? Well, it's lots of things.
Talent - If you're exceptionally good at what you do, then it's possible your skills and advice could be of use to founders.
Smarts - If you're a deep thinker, academic or scientist and have unique insights that can inform investment decisions.
Fame - People rally behind companies that have well-known backers, so it's always helpful to have some social clout.
Network - If you're a highly connected individual with access to people or companies that may help startups to scale.
Money - Access to capital to back incredible founders.
Even if you have all of the above there is one rule that I account for above all others. And that is to not be a dick. I wholeheartedly encourage debate, but I will remove people who are unnecessarily obnoxious.
Angel investors rarely contribute all of the money a founder is seeking to raise, but only a portion. This is referred to as 'allocation', and it is at the founder's discretion as to how much allocation they wish to offer each of their interested investors.
Typically, it is difficult to get allocation in hot deals which is why 'access' is vitally important. Angels will often take up a minority stake of a round and will stipulate that the money they're offering will only be contributed if the founder is successful in raising the rest of their round.
If a founder is raising $3million and the allocation is only $100,000. It's in my interest to protect my LPs capital by ensuring that the founder is able to raise all three million as this increases their runway and chance of success.
If picking winners is so hard and there is luck involved, then why do due diligence at all? There are many possible answers to this, but ultimately I personally believe it comes down to one thing... When dealing with uncertain outcomes, it is reassuring to know that you invested, having made a rational assessment of all the information available to you. It is easier to swallow a loss if your reason for investing to begin with was sound. Doing your due diligence also allows you to grow and form pattern recognition that can accumulate over a lifetime. Despite there being a huge amount of randomness in the fate of a company, it still pays to mitigate the downside. Unlike later stage investing, The role of an angel is not to always make the right decision but to reduce the number of bad decisions. This is why I insist on running a syndicate and not a fund in which people only invest in my decision-making ability. The beauty of a syndicate is that we can collectively discuss the merits of a company while giving every individual the agency to make the ultimate decision. Despite this, you will be joining my syndicate under the presence that I am an effective screener of possible opportunities.
This is a highly simplified version
1. A founder with a great idea or product approaches an Angel with their pitch deck.
2. The angel reviews the deck and performs due diligence and meets the founder.
3. Angels possibly pursue 1 of every 100 decks they see.
4. The angel says they're interested in investing and seeks 'allocation'.
5. The founder and angel discuss how much allocation the angel will be granted of the total amount being raised. Ex $100,000 of a $1million raise.
6. The angel then puts together a deal memo outlining why they think this is a great opportunity to share with syndicate members.
7. The deal is shared, and those who wish to invest contribute however much they want to invest.
8. An SPV is created, which allows all of those contributions to appear as only 1 contribution on the founder's cap table.
9. The investment is made.
The most important part of any angel investment is the entrepreneur you're backing. Great entrepreneurs with a solid business idea have plenty of options when it comes to accessing capital, so who they grant access to is vitally important. Syndicates are an obvious way to bring on strategic partners who can add value to their company. When I set out to create my syndicate, I knew that my network consisted of mainly world-class product people, marketers and creatives. These areas are often costly parts of a business that, if executed incorrectly, can result in the downfall of a company. This syndicate is uniquely positioned to help entrepreneurs who need guidance in these areas.
I got into early-stage investing organically after spending over 10 years working as a designer for companies and startups in London and Silicone Valley. I'd always known that my passion was bringing ideas to life, and investing allowed me to do so at scale while making meaningful change. I realized that my skillset was useful to startups but that I could add more value by collaborating with my network to offer additional services and raise money. The Syndicate is the formalized version of this vision. It helps me to help others who are trying to bring incredible ideas to life.
A small number of my members are visible on my website as a way to demonstrate the level of talent and expertise that are part of the Syndicate.
The vast majority are not visible to the public, and I respect the privacy of my members if they wish to remain anonymous.
In order to attract and retain high profile members, It's important that I protect their time and respect their privacy.
If a member wishes to be introduced, I am happy to do so for legitimate reasons and if the third party is open to the intro.
I wholeheartedly encourage mingling between syndicate members, but I will remove anyone who pesters.
I usually ask members to seek introductions through me to make sure that both parties are open to the introduction.
1. My network
2. Demo days
3. Angel list
4. Crunchbase
5. Unsolicited emails from founders
hello@rickyrichards.com
Angel List is a platform that provides a pre-existing structure for Angels to showcase deals to their syndicate members. It takes a lot of the heavy lifting and infrastructure costs out of the equation to make it easy for both angels and investors to share deals and get backers. You can join my Angel List syndicate here
SPV stands for special purpose vehicle. An SPV is essentially an investment container where up to 250 investors can collectively invest in a single transaction and only appear as one member on a founders cap table.
The syndicate lead (me) is responsible for the management of the SPV. SPVs cost money to create, so most investments will also include a fee that is split among all those who invest to cover the setup costs.
A cap table is a breakdown of all the people who have ownership in a company and the % of the business that they own. In the interest of keeping founders cap tables simple, syndicate investments are seen as a contribution from a single source. For founders starting out, I recommend Capbase for easy cap table management.
There is no cost to be part of The Syndicate, but if you choose to participate in a deal the setup fee per deal covers the creation and management of the SPV, filing fees and wire fees. This fee is split among the investors who opt into the deal.
Due to the number of people that can fit into a single SPV, I normally cap the minimum at $1000. In rare instances, it can be as low as $500. There is no maximum investment, but I may cap deals for investments that are oversubscribed in order to get more members into the deal.
Pro-Rata rights mean that as a syndicate member, you can participate in later financing rounds so that your % stake in a company is not diluted. Not everyone can afford to participate in later rounds of financing but it is generally advised that if an investment is successful in raising additional funds that it makes sense to double down on investments that are doing well.
"Carry" is short for carried interest which, put another way, is essentially a share of the profits made for a successful exit. Carry for The Syndicate is 20%. Carry is paid to the lead for sourcing the deal, negotiating deal terms, performing due diligence, writing a deal memo, hosting webinars, and advising the SPV.
I'm more than happy to split the carry with anybody who can successfully introduce me to companies that we opt to fund. This is useful for members to know if they happen to have a great relationship with a budding entrepreneur but don't currently have the network to access funding alone.
Most startups fail, so it's important that you take a portfolio approach to early-stage investing. Estimates vary about how many investments people typically make before having a favorable outcome, but investors speculate anywhere from 30 to 100 investments. As is always the case, winners seem evident in hindsight. Often companies pivot and reach success in ways that no one quite expected, and while it is important to make informed decisions, it would be a lie to say there is no luck involved. This is why early-stage investors take a portfolio approach; it is not uncommon for most of the portfolio to fail, with the single most successful investment returning the full 'fund' (total invested across all companies) and more. In the context of early-stage investments, you typically look for companies that have the potential, if successful, of returning 1000X on your money. Therefore a company that only doubles your money would be considered somewhat of a failure. Not because you lost money (ultimate failure) but because you invested in a highly speculative investment for minimal return, which is not the goal of early stage investing. Often you would rather a company go bust swinging for the fence than sell early and only return a small multiple. This seems counter-intuitive but the goal is to find a company that goes on to have huge success, and this rarely occurs for conservative businesses. This means you have to be prepared for many of your investments to go to 0 and have faith in a portfolio approach where one or two companies out of the 100 invested in return all your money and hopefully much more.
There are no hard rules when it comes to early-stage investing, but typically, positive outcomes tend to occur in the 5 to 10-year range. It's important to point out that investing in private companies is a very illiquid endeavour, so only invest money that you're prepared to lose or say goodbye to for years to come.
A unicorn is a privately held company that achieves a valuation of a billion dollars or more. In recent years there have been between 50-70 new unicorn companies created every year worldwide.
The returns you get as an investor are massively affected by the valuation at which you invested in the company. It's also worth pointing out that if you invest in a company in its first round, you can expect up to 50% dilution by the time it reaches an exit.
Return multiples based on valuations and a $1billion exit.
5m - 200x
6m - 166x
7m - 142x
8m - 125x
9m - 111x
10m - 100x
11m - 90x
12m - 83x
13m - 76x
14m - 71x
15m - 66.6x
16m - 62.5m
17m - 58.8m
18m - 55.5m
19m - 52x
20m - 50x
21m - 47x
22m - 45x
23m - 43x
24m - 41x
25m - 40x
26m - 38x
27m - 37x
28m - 35x
29m - 34x
30m - 33.3x
Valuations vary based on the amount of capital available to founders. In recent years, there's been a lot of money available, so valuations have increased. As an Angel it's advantageous to get into a company at a valuation between 5M - 10M, although seed-stage companies have raised at values as high as 30Million. Statistically, it's been suggested that regardless of a startups valuation, the most crucial thing to affect your ultimate returns is simply being in those anomaly deals that went to the moon. By this logic, an overvalued company may still be worth investing in if you have a high conviction that it has a good chance of having an outsized outcome.
A good callout, however, is that a company that overvalues itself in the early days will have a more challenging job of living up to the high valuation they give themselves. This means the chances of follow on funding will be severely diminished. For this reason, it's important to assess if a company with a higher valuation will stand a chance of validating that valuation down the line when revenue numbers are of greater importance.
Early stage investing is risky, as most startups fail. But the downside is also capped by you, in that you can invest as much or as little as you like. The upside, however, is uncapped.
It's impossible to 100% know if a startup will go to 0, double your money or 1000X it, but the only way to find out is to invest in the first place. As many investors say, you only have to be right once.
If the amount raised is close to the target and the founder is still interested in having the Syndicate on the cap table, then we still may make the investment. In the event that there's a lack of interest because sysndicate members are unable to see the value that I believe a company has, then, in that case, we have to have an honest conversation with the founder and say that the Syndicate didn't respond as well as we'd thought. In these instances, we'd look to return the money to those who wanted to invest and highlight that the threshold 80% or above had not been met.
I have an extensive due diligence process that I outline in full in this post... Ricky Richards Startup Due Diligence
I intend to send out quarterly updates to all syndicate members of my progress in building the syndicate. As well as a single email when I have a new investment opportunity. In the early days, this will likely account for no more than one email a month max. I also send out a newsletter to non syndicate members a few times a year containing lists of great companies I've discovered but maybe not invested in. You can join that newsletter here.
Where possible, I'll seek to do a zoom call with founders where they can give a little more behind the scenes detail about their business, and I'll open it up to syndicate members to ask questions.
In terms of ongoing questions, I'd encourage members to send them to me, and I will batch email questions to the founders and respond to all those who invested.
I will always request monthly or quarterly updates from founders, but that will very much be at the discretion of the founder, and I will share any updates I receive in my quarterly update emails.
I'd like to grow the syndicate to around 2000 high-quality members, at which point I will offer a premium tier at a yearly cost in return for first dibs on deals and reduced carry. Doing this will allow me to make investing my full-time job and I'll pursue design for love not money. I expect I'm at least 5 years off this target so time will tell.