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Advice on angel investing from a guy who has funded 900 companies

By Danielle Abril, published on Atlanta Business Chronicle (The Business Journals).

Dave McClure, cofounder of Silicon Valley investment firm 500 Startups, has learned the tricks of the trade of investing in startups after shelling out funds for more than 900 companies in more than 40 countries.

"Startups are a very challenging thing," he said recently at the National Angel Summit in Dallas. "Know that most things are going to fail."

While he spoke to a mixed audience that included entrepreneurs, investors and advocates, he catered his message to those interested in angel investing.

Here are some of his tips:

On getting started
  • Your ability to detect if companies will be successful early on is limited. He highly suggests you diversify in at least 10 to 20 investments, arguably more.
  • He wouldn't advise you to invest (ever) if you think you're going to make a lot of money.
  • Make lots of little bets and spread that over time.
  • In your first 5-10 deals, co-invest with other experienced investors and let them handle documents.

When to invest and in whom
  • Invest in things you know and like. Play to your strengths and skill set. Where can you add value? Stay within that expertise.
  • Wait until companies have an initial prototype, have shown that they have the potential to be profitable and have the ability to scale. That's the best time to invest.
  • Don't bias yourselves to the person (or team), look at the products and data. Don't overemphasize the people or idea too much.
  • Make additional investments or double down when users are scaling, revenue is scaling, unit economics are improving, other experienced investors are putting in more money and when founders aren't asking for money. A founder asking for money is usually a bad sign.
  • Don't get bogged down in legal work. Get the deals done.

After you've made an investment
  • Don't expect to become the entrepreneur's boss. Entrepreneurs usually don't listen to people. Trust them to do their job. Remember, you invested with the understanding the project was likely to fail.
  • Write about your thesis, ideas and companies. It's the simplest commercial you can do, and there are so many opportunities for your voice to be heard. There is an incredible opportunity for women VCs and those who share their thoughts.
  • Ask for monthly updates and make companies include their revenue.
  • Ask for a monthly net burn number regularly. If the total can't sustain the business for six months, you should worry.
  • Plan for at least a five-year period, if not longer, to get capital back from investments.

Source: Atlanta Business Chronicle

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