Cryptocurrency industry specialist and tech entrepreneur Michael Cao is a partner at block.one.
Here are parts of his talk at HybridSummit 2017, where he discussed the fundamentals of token economics and how they will change the way startups obtain funding:
What is angel investing and how is it different from venture capital?
To me, the most significant difference between angel investing and venture capital is that you do not just give money. You also give time, wisdom, and a lot of love. That’s what makes angel investing so fulfilling. It’s not just about the money, it’s the relationship.
If you want your angel investment to be successful, you will need to commit long-term. Typically, VCs get to exit in three to five years. Angel investors, on the other hand, will usually need to spend five to seven years committed to the company. Your liquidity is frozen for that number of years.
Because of this commitment, angel investors need to make sure they have the proper funds and enough of a financial buffer in case things go wrong.
Strategies for Building Your Angel Investing Portfolio
There are many things to consider if you want to build a successful angel investing portfolio. The anecdotal information suggests that the rates of return angel investing are highest – but it also shows it’s the most volatile. So how do you deal with this risk and volatility in your portfolio?
First, invest only around 5-10% of your net worth in any company. You should also diversify your risk by having 8-10 investments instead of putting all your eggs in one basket.
Most of your return on investment (ROI) will come from only one or two of your investments, and the chances are high you will break even or lose big on the rest. As a result, you should choose only companies with a strategy and potential that can be carried out on a large scale.
Make sure each of these investments has the capability for 20X to 30X return. This way, when one of your investments does hit the jackpot, the gains will be big enough to boost your entire portfolio.
Next, you will have to determine your involvement with each company you invest in. Will you be the lead investor, or a passive one? Will you be a board member and maybe an adviser?
However, you wouldn’t want to get caught and become the company’s business consultant or go full-time with them. That should not be your job. You cannot go full-time with the ten different companies in your portfolio.
Know when to step aside. You should be aware of where you can take the company but at the same time be prepared to take a step back and ask the help of professionals that have more expertise and can focus full-time on the business.
All these need to be clear right from the beginning. Expectations on both the company and investor must be well-defined.
How to Examine a Potential Startup Investment Opportunity
What should you look for before deciding to become an angel investor for a startup?
I think the most important thing is deciding on a strategy and philosophy that would be most helpful to you. I myself have a few requirements that I always check whenever I examine a potential startup investment opportunity.
First, I believe it’s essential to know and trust the founders. Have they been through hard times and overcome big challenges together, or did they just meet at the bar a week ago?
Second, look at alignment of interest. It is crucial to make sure that the interests of ownership, possession, and control are all in sync.
All the seemingly small things matter as well. Try not to have a board of directors with more than four individuals. Three would be the ideal number. Being an angel investor, I also like to see when CEOs get a relatively modest salary because it shows more commitment.
Every employee should be on board on a full-time basis. Companies that have part-time employees tend to have much less opportunity for success. Find full-time players because you want focus and dedication.
Additionally, it’s important if the company has the chance to build a monopoly. Some people think that competition is great but personally, I don’t think so. Here are the four characteristics of a monopolistic company: proprietary technology, network effects, simple scalability, and branding.
Questions Every Angel Investor Should Ask a Startup
There are several helpful questions to ask startup companies before you invest. For example, when it comes to engineering: “Are you able to create breakthrough technology instead of gradual improvements on an existing product?” 20% improvement is insufficient.
You should also ask: “Is it the correct time? Do you have the potential for a monopoly?” I find it better to be dominant in a smaller market than be a small player in a larger market.
Then there’s the people question. “Do you have the right team?” Peter Thiel has an interesting ideology regarding CEOs and engineers: “You want to have good salespeople and then you want to have good engineers.”
The trouble is, good salespeople generally don’t get along with the engineers and vice versa. However, if you can find a team that is both good and get along well, you’re halfway there.
If you have a great product you will still need to deliver it, which is why you need to ask about distribution. With cryptocurrency it’s easy, because you have global distribution (such as with platforms like HybridBlock).
You should also try to assess the durability of a startup, its product, and opportunity: will the company still be around 20 years down the road?
Finally, the ‘secret’ question: “have you found a unique opportunity that others haven’t?” That’s a tough question to ask, because it’s a very contrarian question.
If you can go against what everybody believes in to find the truth and develop it, that’s where you will get the most value.
Want to learn more about how to be a successful angel investor? Check out the video of Michael Cao’s full presentation at HybridSummit 2017 here.