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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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What Is The Definition of An Angel Investor?

Comments (61)

Yesterday I had a good conversation with Nivi, the co-author of the great Venture Hacks blog.  He recently added me to AngelList, a directory of angel and seed investors that Nivi curates.  Our discussion covered a variety of things, including trying to define the parameters that qualifies someone to call themselves an angel investor.

Historically, I’ve always said that someone can call themselves an angel investor only if they actually make angel investments!  I’ve been exposed to many “angel investors” who have actually never written a check for an equity investment.  These non-angels come in many shapes and sizes and often end up either offering to become “advisors” for equity (or worse – a retainer), “brokers” (where they help you raise money for a percentage raised), or employees (where the end up trying to get a job).  Now, there is nothing wrong with this, other than them presenting themselves as “angel investors.”  Oh, and some people just like to be in clubs with other people who presumably make investments hang out.

My historical viewpoint was an angel investor is defined as someone who makes at least one equity investment in a seed or early stage company each year of at least $25,000.  So, if an angel investor has been investing for four years, they have at least four separate investments of at least $25,000 each for a total of at least $100,000 invested.  Basically, if you can’t (or don’t) invest at least $25,000 per year, I don’t think you should call yourself an angel investor.

As we worked through the StartupVisa stuff, we realized this wasn’t a high enough threshold for the type of angel investors we thought should be able to sponsor a Startup visa.  So, we came up with the definition of a “Super Angel.”  A Super Angel is an angel investor who has been investing for at least three years and has made at least two equity investments of at least $50,000 each in each of the three years.  This is a total of at least six equity investments totaling at least $300,000.  Most of the people I consider Super Angels are substantially above this threshold.

What do you think of these definitions?  Too strict or too loose?  Any other thoughts on how to qualify someone as an angel investor?

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  • http://www.theredcase.com mark payne

    Good point !

    Agree it helps to "define" the term. I see lots of people that call themselves Angels when they are really just looking for the next gig/contract or "equity for time" ….nothing against this, and they do some good stuff – but they are not Angels investors.

    I think the amounts are about right (perhaps the "Super" one could be higher….100K?)

    I think the key point you make is being "active" – once a year is minimum. I stopped calling myself "active" when I didn't do anything for 6 months. I moved to Canada (from the UK) and have taken some "time out" to learn a little about the market, decide where to live and find some like minded investors….not simple!

    Will be active soon!

    • http://xbolumizle.tk/ bolum izle

      Also, in the low dollar amounts common to angels, you get folks who may be angel investors for non-financial reasons, I suppose for the same reasons some guys own a restaurant or a sports team. I mean, $50k is less than the annual dues at a high-end country club, and many folks would rather hang out with entrepreneurs than putt golf balls :-)

  • http://www.onceabeekeeper.com Kevin

    I have always thought that a real Angel Investor need to bring something else to the table other than just equity. Normally, this would be intellectual or domain specific capital.

    There are people that just toss money into companies because they have a lot, are bored or think that the company has a good product or idea. Or, as you mentioned, they want to be part of "the club". However, they do not bring anything else to the table. Not saying this is a bad thing, just that I wouldn't call them Angel Investors.

  • http://www.corylevy.com Cory Levy

    I think your definition is directly on target. Don't call yourself an angel investor if you do not invest… makes perfect sense to me.

    Best,
    Cory

    • http://www.elflaptoptamiri.com/ laptop tamirii

      Great list but I have to say if you're picking one of Iain Banks' Culture novels The Use Of Weapons has to get a shout. The best IMHO

  • http://twitter.com/lancewalley @lancewalley

    I've always thought of these levels of investors:

    * Friends & Family: they invest casually, with little or no formalities and little or no business involvement, in people close to them. $1-100K each investor. At the higher end, this is literally a "Rich Uncle".

    * Angels: they invest a little more formally but sometimes just write a check if they like the team & the market. Perhaps bring some industry experience, perhaps a little more involved in the biz than F&F, but I expect Angel involvement to vary widely according to their background and desires. I expect Angles to be actively investing, at least once a year, and at least $50K each. Much smaller and it feels more like F&F.

    * Big Angels: same as Angels, but investing $200K+

    * Little VC: formal VC process, streamlined a bit for smaller VC amounts under $1M.

    * VC: formal VC process, minimum $1M, typically more like $2-3M and up.

    * Later-stage VC: growth capital, following on the path & due diligence of earlier VCs, usually starting around $10M (not sure if they start smaller).

    • http://twitter.com/valto @valto

      Brad. Very good and important topic. As you know, in startupcommons.org we are working on this same subject to categorize early startups, so I think it clearly makes sense to categorize "angel investors" as well. I think @lancewalley have a very good start in this.

      As the real life & the comments here seem to point out, there nothing wrong with smaller amounts or other activity, those just should not all be stuffed under one general "angel investor" term.

      Also as few comments here point out, for some it may be better if they do more investments with lower $ per investment than less with higher $, while keeping the annual $$ the same. Like someone new to investing perhaps. Getting more experience in shorter time, with distributed risk and more viewpoint to business/investing (also they need to have time to spent).

      If we would continue on @lancewalley categories/levels, what would you or others like to add to that?

      Myself, I would like to suggest a change to FFF term, perhaps micro angels? Since, if you are not friend or family, you are a fool and who would like to be that :)

      Also those that are looking to invest "sweat equity" should have term of their own – Service investors?

      What do you think?

      PS. thank you for your Startup Visa efforts :)

      • http://intensedebate.com/people/bfeld Brad Feld

        I actually like the FFF label – I’ve definitely been the third F in that list plenty of times! 

        I don’t think sweat equity is in the same category of any of this.  I have no issue with people getting sweat equity, but I just don’t think it is equivalent in nature to an angel investment.

  • http://intensedebate.com/people/bfeld Brad Feld

    Very good categorization.

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  • http://www.facebook.com/angusdavis Angus Davis

    Brad, the conversation here focuses on the amount and frequency of investments. I actually think a third factor that significantly segments those making investments in the $25 – $250k range is the risk/reward tolerance and appetite. Some folks will write a $50k check any day of the week, but only if they believe a company has a shot at breakout potential in terms of future revenue, yielding 10x+ returns on investment. On the other hand, there are folks who have comfort writing a $200k check, but they may be more likely to invest in a company with a 50% chance of profitability than a 1% chance of being a homerun. The risk/reward tolerance varies significantly among angel investors, often because they are investing their own dollars instead of OPM.

    Also, in the low dollar amounts common to angels, you get folks who may be angel investors for non-financial reasons, I suppose for the same reasons some guys own a restaurant or a sports team. I mean, $50k is less than the annual dues at a high-end country club, and many folks would rather hang out with entrepreneurs than putt golf balls :-)

    So the motivation, the tolerance for losses, and the expectation of returns are all factors beyond simply amounts and frequency that in my mind significantly segment those who are active in angel investing. Often for a company looking to raise, say, $200k, it's more about finding an investor with the right tolerance, appetite, interests and motivation, than it is about finding someone who writes a $25k vs. $50k check or invests 4x per year vs 2x per year. I think Nivi should add a few more columns to his Google spreadsheet.

    • http://intensedebate.com/people/bfeld Brad Feld

      Great comment.  Another comment referred to an MIT Entrepreneurship Center matrix of different types of angel investors that you are alluding to here.  I’ll write a post on it soon.  http://www.scribd.com/doc/24653494/MIT-Angel-Cate… />

  • http://twitter.com/tylerwillis @tylerwillis

    I agree mostly with your categorization, although I think velocity is more important than volume.

    Y-Combinator, for example, often makes investments under 25K. I also know of an angel (no longer active), who would make several 10-20K bets in a year (5-6+) instead of few, larger bets.

    I don't think small deal size should disqualify you as being an angel: I'd say amount of deals (at least one a year) and total annual capital invested (either 25K+ or 50K+), combine to legitimize you as an angel.

    With regard to Startup Visa, I favor your layout. People being sponsored to open a business here should have more than one month runway — so selecting for angels who make more sizable bets makes more sense there.

    • http://intensedebate.com/people/bfeld Brad Feld

      I’m very familiar with the YC investment dynamics as TechStars (which I’m involved in) are very similar.  I don’t view YC, or TechStars, as angel investors.  They are in a different category.

      I struggle some with individual investment size (e.g. the $25k threshold) vs. it being an annual dollar threshold independent of number of investments.  Your point is a valid one.

  • http://www.techdirt.com/ Mike Masnick

    Quick question that I don't understand: why does a "startup visa" need an *investor* to be a founder. What's wrong with bootstrapped startups? I'm a huge supporter of the founder visa concept, but I'm troubled by this idea that investors are the gatekeepers/sponsors.

    • http://intensedebate.com/people/bfeld Brad Feld

      There is nothing wrong with bootstrapped startups – in fact, I’m a huge fan of it (for example, http://www.feld.com/archives/2009/12/the-amazi… However, when we started exploring the idea of a Startup Visa, two things came up.  First, there was huge (political) concern about the potential for gaming the system.  We’ve spent a lot of time focusing on that and having an investment threshold in the startup helps with this.  Second, we were advised strongly to try to use an existing visa structure and try to modify it.  We looked carefully at them all and the EB-5 was the most logical / parallel to our goals for the Startup Visa (I’ve written about this before, but the EB-5 is basically the inverse of the Startup Visa – a foreigner gets a Visa if they invest $1,000,000 in a US-based company – with the Startup Visa, the person getting the Visa is the entrepreneur). 

      As a result, some level of investment threshold was required to address these two issues.  We focused on making sure that it was a seed level investment threshold ($500k) and that both qualified angel investors and qualified VC investors could be the “sponsors”.  Defining what “qualified” means is also important per the gaming concern above.

      Ultimately, our view is that this kind of a Startup Visa is much better than nothing.  Optimally, we could figure out a way to include bootstrapped startups into the mix.  I’ll definitely continue to think hard about this as we work through all this stuff.

  • http://twitter.com/calbucci @calbucci

    Brad, I think your definition is good. One thing I would add is a peeve of mine: People that invest on their own company and call themselves angel investors. It's quite common and I think people do that exactly to be part of the club.

    I think an "angel investment" event should exclude investments on companies the person has founded, and/or is an executive of, and/or is already owner of 5% of more, and/or is an investor on a previous round (or common stock).

    This way you avoid some one investing 3 times on their own startup and be qualified by your definition.

    Happy new year!

    • http://intensedebate.com/people/bfeld Brad Feld

      Good qualification.

  • Enrique

    I agree an investor in nascent enterprises should have a track record of investing before being called an Angel and also agree that investment amounts are likely to be modest driven by both investor limitations of using own funds and startup needs.

    However, I also agree with Angus that the risk profile should be part of the definition (perhaps stages of Angel investing?) and would add relevant expertise as another dimension. MIT has, what I think is, a simple and straightforward framework for categorizing Angel investors (http://www.scribd.com/doc/24653494/MIT-Angel-Cate… I think this framework can serve as the foundation to many variants of Angel definition.

    Happy New Year everyone!

    • http://intensedebate.com/people/bfeld Brad Feld

      The MIT Angel Category 2×2 grid is awesome.  Thanks for pointing this out – definitely worth a post.

  • Ferd

    Of course you're not an "Angel Investor" unless you make "angel investments." Duh! But, I've met great angel investors that have not invested in two years, who are very selectively looking for the "right companies" to invest in. They're not looking to join any clubs, they don't equate amount and frequency to dick size, and are not posing as anything beyond what/who they are. Why do you propagate such broad generalities? Young entrepreneurs read this shit like the gospel.

    • http://intensedebate.com/people/bfeld Brad Feld

      I’m not suggesting that “amount and frequency” is equated to dick size.  I’ve worked with a wide variety of angel investors and have rarely met any serious ones who don’t make at least one $25k investment each year so I think that’s a pretty low threshold.

      Can you give me some examples of the great angels you are referring to so I have a little more context.

      • Ferd

        Respecting privacy, I won't mention anyone by name, but I have met and co-invested with people that quietly invest in companies they like, however often they're comfortable. I'm not sure why people this requirement for nomenclature, but maybe adding "professional" (whatever that means) might make some people feel better.
        The bottom line (for me) is too find people you like and respect and develop the relationship (on both sides). I couldn't care less who is designated an "Angel Investor." The process is not as formulaic as many bloggers make it out to be. It requires brains, trust, experience, patience, intuition and lots of other stuff that you can't memorize.
        I dunno, maybe it's just me, but I wonder if the quest for definition is really just quest for blog fodder??

  • http://intensedebate.com/people/smurchie Steve Murchie

    This is a resonable total dollar bar for an typical angel, though I'd recommend looking for an average over three years of $25K annually so you don't exclude the more targeted/cyclic/casual investors. Ultimately you need both volume and frequency, and it is a mischaracterization to require an angel to be actively seeking investment all the time.

    As for the Super Angel definition, you could probably up the requirements both in volume and frequency, but don't. A Super Angel is focused on this activity and will likely make 2-3 investments per year. While in my experience the SAs invest more than $50K at a time as well, I don't think that volume is necessarily the characteristic you're looking for – it's activity level: a gauge of seriousness, knowledge, capacity.

    Recognize, too, that angels (super and mere mortal) aren't always individuals: some are representatives of family offices or small PEGs that invest mostly their own money. So not institutional VC, but a step up in seriousness, knowledge and capacity from the typical individual.

    • http://intensedebate.com/people/bfeld Brad Feld

      Yup – I should have been clearer in the Super Angel language that it includes family offices and angel group entities. 

  • Phli Sugar

    My thoughts are its binary.

    You either have invested at least $100k total (I don't care if its in one or in four) in an outside (non-related) company or you haven't.

    If you have you're an angel investor if you haven't you're not.

    I would not qualify myself as an angel because I've worked at all the companies I've funded.

    I've never raised angel money, however, when I've helped out some fellow entrepreneurs and gone with them to an angel event, I found I needed to ask only one question: So what companies have you funded? Talk about a litmus test! The answer was either an enthusiastic description of cool companies or a shuffling, mumbling, look at the ground exercise.

    • http://intensedebate.com/people/bfeld Brad Feld

      I like the qualification of having to invest in someone else’s company.

  • http://twitter.com/jgwaller @jgwaller

    Great post. I think the black & white issue is, of course, their interest & ability to invest. I think another, often overlooked, element is an angel's realization about needing to invest in follow on rounds. Both to keep from being washed out by a VC, but also to be able to follow on *before* a VC comes in. As we all know, it usually takes more time & $ to meet milestones, raise $, etc. than entrepreneurs think.

    Once an angel has met the broad definition of an angel, I like to break them down as follows:

    1) Monsters – as in Monster.com – these are people that can invest, but they are really looking for a job as much as for an investment opportunity. "Hey, I really like your idea, but you need a CFO (or VP Marketing, or, or, or…). At my last job as CXO/VP I did…"

    2) Trolls – as in a service provider looking for clients. "I really like your idea, who's doing your legal work? It just so happens I'm a lawyer specializing in start-ups…"

    3) Dentists – Nothing against dentists, but talking about gingivitis isn't necessarily interesting cocktail talk. Talking about the hot new startup they just invested in is a lot more interesting. These people are just looking to be involved in something cooler than they are. Obviously they don't have to be dentists… For some reason though I really do run into a lot of Angels that happen to be dentists…

    4) "Dumb Angels" – need a better name here, but these are often loaded (family $, or they just sold their bottle cap company for $100M) individuals, but not very interested in really watching over their investment, or adding value. They want to get in, or stay in, the game.

    5) "Real Angels" – these are the ones that not only fit all of the generic criteria of an Angel, but also can add value in advice, a rolodex, experience, cutsomers, ability to follow on, introduce to VCs, willing to use their name, etc.

    6) “Evil Angels" – These are angels that think they are #5s, but are really just ignorant, blowhards. They are definitely more trouble than they are worth. These people write a $25K check, demand to know the every little detail about the business simply to give them fodder to pontificate about how business should be done. They demand the most access, onerous terms, etc. & not only don't add value, but actually take value away by sapping the CEOs time, energy, & focus for the "angel's" own ego. Obviously these people should be avoided at all costs (yes, even if it means not getting the investment)

    I'm not necessarily making a value judgment on any of these types (except for #6 of course). I actually think 1-5 all can have their place. All of their $ is green & if you have enough advisors, value adding investors, etc. sometimes just the $ is enough. You just need to know who you're dealing with before you jump into bed w/ them. My 2cents…

    • http://intensedebate.com/people/bfeld Brad Feld

      Superb categorizations below, especially “Evil Angels”.  And your comment on having follow on capital is important – I have always believed that a 100% reserve is required for any angel investment (e.g. if you are willing to invest $50k in a company, you should only invest $25k in the first round you invest in.)

  • http://www.virvo.com Company

    I dont think there are strict rules you can set – essentially an angel is someone who invests in companies, usually at the seed stage.

    But… if i were to set numbers, it would be much higher than your threshold levels.

    • http://intensedebate.com/people/bfeld Brad Feld

      Why would it be higher?  What do you think reasonable thresholds are?

  • http://StartupTrek.TV Steve Bell

    Good criteria and I tend to agree with the critieria and the sentiment expressed in the comments. Let me add another dimension to the discussion by pointing out some facts I've picked up while working over the past ten years trading my own accounts, and as Chairman of a small Hedge Fund. I'm a Series 7 & 63, and have extensive expertience with trading and money management, and these are some pertinent facts I've learned:

    1> As any Hedge Fund Manager will tell you, if you have more than 2% of your fund invested into one position, then (the way the Math works out), then sooner or later (more likely, sooner) you are headed for a 30 to 50% drawdown in your portfolio. It's impossible to escape the connection between risk and reward, and this rule of thumb has been proven time and again. You can trade larger than that and get away with it, but it always catches up to you.

    2> Using well-known, long-term wisdom from best practices in money management (asset allocation) most Angel investors allocate between 5 and 15% of their total investable net worth to Angel Investing. The rest would be allocate to things like publically traded stocks, bonds, real estate, commodities, etc. A few higher than that; but let's use 10% as the average Angel's allocation.

    So when you combine these two well known,, common sense rules of thumb, what does it tell you? It says that in order to invest $25k into a single startup, then you need to have an investable net worth (not total net worth; investable) of at least $12.5M. Because 10% of $12.5M is $1.25M, and 2% of that is $25k, a reasonable investment into a single startup.

    There are about 1 million individuals in the US that dabble in Angel investment, but only a small percentage of them have a net worth that large. In other words, betting $25k at a clip on startups, is equivalent to shooting craps in Vegas, for most investors – those with a smaller net worth.

    Another rule that has emergeed, and is often discussed in the ~400 Angel investing groups across the US, is that an Angel investor will need a critical mass of at least 12 Angel investments, in order to expect to have reasonable odds of "survival" (e.g., not to suffer total loss of capital) as an Angel investor. This rule of thumb, like those above, is not an absolute; but has emerged as conventional wisdom over a long period of time. First and foremost, results will vary based upon market conditions. It is a well known fact, for example, that Venture Capital returns are highly correlated to the Nasdaq index. It is likely that Angel returns are as well, but that has not been well established by any of the 6-8 researchers in the US who study these things.

    Taking the rule of 12, that implies that an Angel investing $25k at a clip, needs to get into at least $300k of positions, in order to have a fighting chance of staying in the game without deploying additional fresh risk capital. If that's 10% of investable capital, that says you should have an investable net worth of at least $3M to start.

    One of the Angel groups where I'm a member, the Keiretsu Forum (Silicon Valley Chapter), has a policy of asking each member to make at least one, preferably two, $25k+ investments each year. Otherwise, you are asked to not renew your membership. Their is a $3k per year fee to maintain your membership as well, so that filters out the "fake Angels" pretty effectively.

    Hope that adds some insights! My take-away is, that entrepreneurs should better understand money management and asset allocation from an Angel's perspective, because in reality a $25k investment in a single startup, is too big of risk for even most accredited investors. Better to form an LLC and have many "small" Angels invest $5k+ into it,, then deal with the LLC as a single entity, rather than with individual Angels. Because the # of accredited investors out there, out of the 1M in the US who engage in Angel investing, is heavily skewed towards the threshold of 1M net worth, vs higher #'s. Especially after the events of the past year – many of them have even been "de-accredited", to use an amusing term I heard recently:)

    -steve bell

  • http://StartupTrek.TV Steve Bell

    Good criteria and I tend to agree with the critieria and the sentiment expressed in the comments. Let me add another dimension to the discussion by pointing out some facts I've picked up while working over the past ten years trading my own accounts, and as Chairman of a small Hedge Fund. I'm a Series 7 & 63, and have extensive expertience with trading and money management, and these are some pertinent facts I've learned:

    1> As any Hedge Fund Manager will tell you, if you have more than 2% of your fund invested into one position, then (the way the Math works out), then sooner or later (more likely, sooner) you are headed for a 30 to 50% drawdown in your portfolio. It's impossible to escape the connection between risk and reward, and this rule of thumb has been proven time and again. You can trade larger than that and get away with it, but it always catches up to you.

    2> Using well-known, long-term wisdom from best practices in money management (asset allocation) most Angel investors allocate between 5 and 15% of their total investable net worth to Angel Investing. The rest would be allocate to things like publically traded stocks, bonds, real estate, commodities, etc. A few higher than that; but let's use 10% as the average Angel's allocation.

    So when you combine these two well known,, common sense rules of thumb, what does it tell you? It says that in order to invest $25k into a single startup, then you need to have an investable net worth (not total net worth; investable) of at least $12.5M. Because 10% of $12.5M is $1.25M, and 2% of that is $25k, a reasonable investment into a single startup.

    There are about 1 million individuals in the US that dabble in Angel investment, but only a small percentage of them have a net worth that large. In other words, betting $25k at a clip on startups, is equivalent to shooting craps in Vegas, for most investors – those with a smaller net worth.

    Another rule that has emergeed, and is often discussed in the ~400 Angel investing groups across the US, is that an Angel investor will need a critical mass of at least 12 Angel investments, in order to expect to have reasonable odds of "survival" (e.g., not to suffer total loss of capital) as an Angel investor. This rule of thumb, like those above, is not an absolute; but has emerged as conventional wisdom over a long period of time. First and foremost, results will vary based upon market conditions. It is a well known fact, for example, that Venture Capital returns are highly correlated to the Nasdaq index. It is likely that Angel returns are as well, but that has not been well established by any of the 6-8 researchers in the US who study these things.

    Taking the rule of 12, that implies that an Angel investing $25k at a clip, needs to get into at least $300k of positions, in order to have a fighting chance of staying in the game without deploying additional fresh risk capital. If that's 10% of investable capital, that says you should have an investable net worth of at least $3M to start.

    One of the Angel groups where I'm a member, the Keiretsu Forum (Silicon Valley Chapter), has a policy of asking each member to make at least one, preferably two, $25k+ investments each year. Otherwise, you are asked to not renew your membership. Their is a $3k per year fee to maintain your membership as well, so that filters out the "fake Angels" pretty effectively.

    Hope that adds some insights! My take-away is, that entrepreneurs should better understand money management and asset allocation from an Angel's perspective, because in reality a $25k investment in a single startup, is too big of risk for even most accredited investors. Better to form an LLC and have many "small" Angels invest $5k+ into it,, then deal with the LLC as a single entity, rather than with individual Angels. Because the # of accredited investors out there, out of the 1M in the US who engage in Angel investing, is heavily skewed towards the threshold of 1M net worth, vs higher #'s. Especially after the events of the past year – many of them have even been "de-accredited", to use an amusing term I heard recently:)

    -steve bell

  • http://StartupTrek.TV Steve Bell

    Yes, Brad that's a crucial point for Angel investors to be aware of, and go into the activity with that as an "operating rule", in order to have a fighting chance.

    You know, there is an immense amount of "prior art" and wisdom available from the world of public equity investing. Here we are talking about private equity investing, but many of the "huge principles" translate directly. Private equity is less liquid, and the price of shares isn't "marked to market" every fraction of a second; but a lot of the principles still apply.

    So which ones are most important? Money management rules, just as they are in public equity investing. They overwhelm every other consideration, as they set your risk profile (probability of gain vs loss) which is what the activity is all about. In public equities, "trading style" is a close, tightly related second topic of importance. In Angel (private equity) investing, selection of deals is the most important factor, since exits tend to be less in your control (sale of company, etc).

    In stock investing, many investors gravitate towards putting an equal amount of $ (e.g., $25k, $50k, $100k, etc) into each position they take. What I slowly discovered, over years of trading – this was my greatest discovery, approaching the holy grail of money management (i wasn't the first to discover this, by any means), is that although that is a good first step, it is not the BEST way to size your positions. There is another way that yields much better results – a "smoother" uptrending equity curve. And that is VOLATILITY BASED position sizing. This is something you can do with publically traded stocks, that may be harder to do with Angel investments, but some of it could carry over.

    In a public stock, there is a precise, mathematical measurement of the historical volatility of a stock – one way to do it is to use "Average True Range" (ATR). It is simply the "average daily excursion" (high-low) of a stock's price, averaged over a number of days (5 days is common). So i begain to take my average position size, and DIVIDE it by the ATR, to arrive at my position size. So instead of investing $100K into GOOD and $100K into C swing trade positions as if they were the same animal, I would be investing $10K into a GOOG position and $150K into C (a low volatility banking stock). Accompanying my position sizing changes, i set my stop 2.5 ATR's away from my point of entry, so i was risking the same $$ on every trade. The change in my results was remarkable, and I have used it ever since. I'll bet there are a lot of good Hedge Fund managers who do the same, but they don't like to talk about their secrets.

    How would this translate to Angel or Venture Capital investing? It's hard to quantify the historical volatility of a private equity, since there is no history, and the stock price isn't marked to market. You could invest smaller in startups which appear to be "long-shots". But one of the crazy things about investing is, your hunches and guesses often come out wrong. So if you try to second guess the market, the results are (most) often less than if you hadn't messed with your investing formula at all. But it might be worth some thought, since it works so well in public market investments.

    I believe the way that some VC's handle a startup that looks like a potential high flyer (OR, a crash and burn), is to syndicate the deal more broadly. But I'm no expert on that.

  • http://intensedebate.com/people/bfeld Brad Feld

    Re: Blog Fodder – I’ve got plenty of it!

  • http://intensedebate.com/people/bfeld Brad Feld

    Again – great stuff – thanks for putting this out there.  I don’t trade public equities personally – I’ve decided I suck at it and it’s distracting from what I like to spend all my time on.  That said, the lessons from great public equity investors and investment strategies are really helpful.

    My view is that this ultimately boils down to the need for a strategy.  There are plenty of different strategies for investing (angel, VC, public equity, bonds, commodities, whatever) – the key in my mind is to have a strategy you believe in and stay with it.  Adjusting the strategy systematically based on new information is fine; however, I see many people in my universe (e.g. angels and VCs) “chase strategies”, or “chase segments”, or “pretend to have a strategy for marketing purposes but then do random things.” 

    There are plenty of exogenous factors that impact the strategy – in my experience the great VC investors understand this, are thoughtful and patient, and make deliberate long term decisions while focusing on the things they have control over, while the not-so-great (or bad) VC investors get wrapped up in all the exogenous stuff and don’t end up spending enough time on the things they have control and influence over.

  • http://StartupTrek.TV Steve Bell

    Yep… and the best strategies tend to be SIMPLE. Those are the ones that work. It's important to understand the nature of risk, that in any investing strategy there will be good periods and bad periods. The problem with many strategies are that they produce sensational returns short-term, and disasters long term (e.g., look at the Derivatives strategies our big banks were persuing).

    Two big reasons I saw, working on trading floors in NYC, Chicago, and SF over the past ten years: either the trader pursues one of those "too good to be true" strategies, or they constantly change their investing strategy. The best traders lock and load with a simple strategy, then stick with it, and get extremely good at the "nuance". Probably works the same in Angel and Venture investing. The selection of the (right!) initial strategy is the big thing, then stick with it!

    There are very few equity traders that are truly successful long-term, because it goes against human nature to abide by these rules; and even if you do, the market is constantly changing. I've heard from more than a few top VC's that same thing is true in venture capital: that the # of VC firms that are consistently successful is highly skewed, to just a few firms. You here numbers thrown around but VC returns, are pretty much privately held information.

    I suspect the same "highly skewed" results also occur in Angel investing. There has been several big studies on the topic; but they are forced to take a number of big "assumptions", which may or may not fit reality.

  • http://intensedebate.com/people/bfeld Brad Feld

    My opinion on most of the public data is that it’s poor.  The serious academic studies tend to be better, but are still working with weak or incomplete data sets.  Folklore in the VC business runs rampant and all the various “studies” just accelerate the spread of myth.

  • http://intensedebate.com/people/bfeld Brad Feld

    Steve – good comments.  One that is critical – and that I’m due to write a post on – is the notion that for an angel investor to be successful over the long run he should make a series of equivalently sized investments with a consistent cadence over a long period of time.  It’s very aligned with your idea that an angel investor needs to have at least a dozen investments to have reasonable odds.  Time diversification and capital allocation consistency (same $ amount / investment) is a pretty important part of this.

  • the quiet one

    Interesting post brad.

    As you know my family backs start ups and boulder companies. I have always one day wanted to become an angel investor one day. I’m still young, that will come one day.

    Anyways. I don’t like how you put a label on what’s an angel investor. Yes we have big players, big hitters, small players and all this VC chatter. I get all that.

    I feel an angel investor is this. A person willing to invest in a seed capital company or round 1 with an investment. Weather it be 25k or 10k. Now I would not say to be known as an angel investor you have to invest every year. That’s ego talk imo and turn off. I will disagree on this one by you. One investment in a company is an angel investor in my eyes. If the person decides to have a 25k investment in a start up for 5 years, 10 years and dosent do more deals that’s an angel investor.

    Your not going to my mom who hardly does trades each year she isn’t an investor in the stock market. Same example. She is an investor in the stock market, be a mutual fund, re invest things and dividends. She took that risk and if she decides not to invest in a certain amount each year, that’s her choice. Same thing with an angel investor.

    I don’t mean to disagree on this one. You know I have tons of respect for you and what your doing.

    J

  • the quiet one

    My buddy raises capital for companies and offers his contacts, puts deals together and guess he is known is known as a broker.

    Yes most of the time he takes his fee in cash and if he really loves the company he will invest in shares without cash for the confidence of things and other investors. He does what needs to be done.

    I almost consider him as an angel investor too but in the VC world its not.

  • Rick Mason

    Brad,

    How about eliminating anyone who charges the enterpreneur a fee for the right to pitch? Here in Michigan where there aren't a lot of real angels these groups are quite common.

    If you don't there will be lots of foreign entrepreneurs wasting a lot of time and money with these groups because they simply don't know any better.

    • http://intensedebate.com/people/bfeld Brad Feld

      I completely agree.  I’ve written extensively against “pay to pitch” – I think it’s terrible.

  • the quiet one

    @Rick

    I’m from Michigan Rick and there are a couple contacts here promoting things

    Start up nation is a good site for business owners

    Then there are the Sloan brothers doing awesome things.

    Look them up.

    I agree though not much happening here and its not like boulder or what brad is doing. Boulder really is a hot spot and emerging firms.

    I did however read that Michigan is in top 10 for nano tech realted stuff and more movies being filmed here which is good

    Michigan is a sinking ship and I was I was in boulder running my dream online projects and chamber out there.

    Ps brad sorry if I came across a bit harsh. Didn’t mean to and was direct at you.

  • the quiet one

    Wasn’t meant direct to you I meant brad.

    On my blackberry and 3am here.

  • http://intensedebate.com/people/CVMott CVMott

    Great discussion – the Angel Capital Education Foundation (funded by the Ewing Marion Kaufmann Foundation) is currently performing the research to help clarify definitions for Angel Investor and Super Angel. My organization of angel investors, BlueTree Allied Angels, ( 21 investments to date ~ $14M) is a founding member of the Angel Capital Association, where we expect member groups to ensure that their investors are active investors and conduct themselves professionally. The ACA information and research to date demonstrates that members of our groups minimum investment per deal is ~ $25K and average amount per deal from a group is ~$260K. This varies from region to region, i.e. amounts are much higher in Silicon Valley groups than in the Ohio groups. I genuinely appreciated viewing all the discussion on this topic.

    • http://intensedebate.com/people/bfeld Brad Feld

      Thanks for the pointer to the Angel Capital Education stuff – I’ll go poke around on it now.

  • http://siliconangle.com John Furrier

    Great work on the StartupVisa efforts Brad.

    I've been investing my own money in my own startups for over 12 years. What this year at 44yrs old I stop doing startups and start investing my money (and maybe others) in startups other than my own in $50k chunks and say I would do 5-10 investments a year. I would not qualify to be an angel or super angel by your timetable metric. Did I read that right?

    side comment: I do think that you have been and are part of this emerging new school of investors that are way ahead of the pack. Glad to see you leading the efforts. One thing to consider in all of this stuff is that there are many of us schooled and harded with experience in entrepreneurship not just venture guys. In fact some of the best angels come out of the entrepreneurial ventures doing great work in year one as an angel investment.

    Cheers

    • http://intensedebate.com/people/bfeld Brad Feld

      According to the proposed definition you wouldn’t be an angel or super angel today.  However, after year 1, you’ll be an Angel investor.  You’ll also likely have exceeded the Super Angel threshold in dollars, although not in time diversity.  The only reason for the three year tempo in the context of the StartupVisa stuff is to prevent gaming the system – specifically the Super Angel has to demonstrate a history of angel investments to be able to sponsor a StartupVisa.

      One commenter suggested that you have to invest in someone else’s company (rather than just your own) to be considered an Angel investor – I think this is a reasonable parameter.

      Re: some of the best angels come out of entrepreneurial ventures – I completely agree as that’s how I got started.  I sold my first company in November 1993.  I started making angel investments early in 1994 – my first was NetGenesis (IPO in 1999), my second was Thinkfish (acquired by CA), and another early one was Harmonix (acquired by MTV).  I didn’t start investing as a VC until 1996.

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  • AAA

    Whatever the definition, I think you need to back into how many angels out there would actually match it. Not sure what the right number is, but if only a handful (<50), then a lot of control may end up in the hands of a very few which may lead to questions about the visa itself. You don't want the visa to become a deal term ;)

  • http://intensedebate.com/people/bfeld bfeld

    I think the number of potential angels in this population in the US are well above 10,000 so I don’t think it’s a key concern, but definitely worth pointing out.

  • Thomas

    Is this angel investor the same as the eb5 investor visa, or is it completely different? It seems the same but I have never hard it referred to as this before…

  • http://www.filmizlecez.com adult izle

    good job on StartupVisa efforts :)

  • http://eb5central.com/ eb5 investor visa

    I wonder how this definition can be applied to immigrant investors as part of the EB5 investor visa program. Yes, they are investing in another business but they are ultimately doing it less for returns or for social good than for a green card and entry into a path for citizenship.

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