Angels are real…and they walk among us.
Okay, so not like those spiritual humanoid beings with wings and a seemingly innate ability to play the harp, but rather a different kind of angel; an angel investor.
Like the Tibetan mastiff, angel investors are a special breed. They are investors who provide financial support specifically to start-ups or entrepreneurs. The money they inject can be the kick start that many start-ups need to get going. Angel investors are responsible for bringing many now-huge companies into the public sphere.
Angel investors are different from venture capitalists…although sometimes the lines do blur. Typically, angel investors are individuals and are putting up their own money, while venture capitalists (VCs) tend to work from behind the cover of a limited partnership (they have a company and will borrow the money needed). Angels typically invest between $25 and $100k, while VCs will put up a figure many times that. Angel investors also get involved earlier than venture capitalists – seeding budding start-ups with money at a stage where there might not even be a viable product yet. At most, a founder of a start-up might have a prototype. At this stage, angels are investing in an idea.
If you think that sounds like a lot of risk – then you’d be right. But the rewards are huge. It is estimated that less than 0.2% of angel-backed companies end up going public and only 1.5% go on to become acquired by other, larger companies. So all this this begs the question: who are the best in the game?
1. Y Combinator
Y Combinator is a well-known start-up fund/accelerator in with an incredible amount of success in this space. Since it was founded in 2005, by Paul Graham, Jessica Livingston, Robert Morris and Trevor Blackwell, they have spawned countless kickass start-ups such as Airbnb, Reddit, Dropbox and Codecademy. You may recognize the names.
The fund offers a standard deal to all their ‘fellows’ – which translates to a cash for equity deal: about $120,000 for a 7% stake in the company.
The fund is impressive. If you were to add up the value of all the companies they have helped launch it would be about $65 billion. They’ve funded more than 900 companies and 8 of those have gone on to be worth more than a billion dollars.
There have been failures as well; it just comes with the territory. More than 170 companies have dissolved since getting funding from YC, but it only takes one big win to more than make back your money. Consider the example of Twitch, the live-streaming website focused on the gaming community, which was bought by Amazon for $970 million dollars. 7% of that is a pretty juicy cut, isn’t it?
2. Naval Ravikant
Naval Ravikant is widely regarded as the top angel investor. He is widely respected in Silicon Valley and he is the angel behind companies such as Twitter and Uber – which is just insane. He’s made nearly 100 investments ranging in value from $100,000 to $10 million.
He recently guided OpenDNS to an acquisition by Cisco (yep, that Cisco) for $635 million. Yikes!
If you’re wondering what’s in the secret sauce that makes this guy tick…well, he credits his success to reading prolifically.
If you want to get to know him better, check out his writing here.
3. Tim Ferriss
Tim is maybe better known for his book The 4-Hour Work Week and all the life-hacking advice provided therein, but Tim is also a very successful angel investor.
He got where he is now by focusing on what he knew well. That meant investing in a very particular type of company: typically consumer-facing, products that scratched a very personal itch. He got involved in companies where he could make a big impact as someone with a large network and very specialized knowledge.
It reminds one of Peter Lynch, the great hedge fund manager who advised that people invest in what they know.
By focusing on companies that targeted 25-40 year-old tech-savvy males in big US cities, Tim was able to leverage the power of his already-established audience (people who fall in that exact category). He could get the ball rolling even faster, so to speak and create a virtuous cycle quickly.
He also has a unique perspective that could apply to a smaller investor making investments. Ferriss stayed away from making big investments that might generate huge returns at the cost of massive emotional turmoil. Put another way, he didn’t want to put all his chips on the line. The amount of mental anguish wasn’t worth it. That’s advice anybody can benefit from.
4. Ron Conway
Ron Conway is an angel investor and philanthropist who’s been called Silicon Valley’s “super-angel”. He wasn’t initially very tech savvy, but is now regarded as one of the most influential tech investors and best-networked angels out there. He is the founder of Angel Investors LP and has made investments in Google, Ask.com and Paypal.
Conway says that his philosophy is to invest in the people first, and then to think about the market size and potential later. A start-up is an incredibly taxing burden and bringing a viable product to market doesn’t happen on your first try. That’s why Ron is always on the lookout for the type of founders who have what it takes to be successful.
He’s also on the lookout for what he dubs “mega-trends”. Social media, e-commerce and leveraging the power of crowds are examples of these mega-trends. Quora is an example of a platform that leverages the power of crowds, a question and answer website where much of the content is provided by the users. Applying these strategies has allowed Ron Conway to become an extremely successful, and wealthy angel investor.
Any big angels that we missed? Let us know in the comments!