What you need to know to succeed as an angel investor

Jay Hetzel walked it before he talked it. With a doctorate in veterinary genetics, he worked as a scientific researcher at the CSIRO for 20 years before embarking on the commercialisation of some of his findings. With a partner, Hetzel started Genetic Solutions – which developed animal DNA analysis tests, initially focused on the eating quality of beef – in 1998 and a decade later the pair sold it to Pfizer’s animal health division.

“Having had the experience, the highs and lows of being an entrepreneur, I decided I would reinvest back in early stage inventions as a way of encouraging innovation, supporting innovation and looking for a good return on my investments,” he says.

But Hetzel found his first approach to angel investing was flawed. “Initially I started investing individually and investing relatively large quantums, making larger investments in a small number of businesses, some of which were successful and some were not,” he says.

“But I learned that I didn’t have all the expertise to make the best investment decisions, particularly outside the life science field.”

Hetzel had taken stakes in life sciences businesses but also dabbled in technology companies. One social media venture now resides in the segment of his portfolio he calls “the walking dead”.

“It was a credible team … but it didn’t gain the market traction. It didn’t get the volume of users that it was expecting but more importantly it had trouble monetising the business model.”

Three years later, the company “hasn’t died yet but they’re the walking dead,” he says.

So Hetzel changed his approach, joining the Brisbane Angels. “I decided to join a community of active investors,” he says. “It allows me to take much more of a portfolio approach. The quantum is lower but I can invest in more businesses.”

After a successful exit, many business founders have a desire to give back to the community and support other emerging ventures. They may have experience pitching to rooms full of wealthy individuals but have never played on the other side of the fence. Going from entrepreneur to angel investor is not simple. BRW spoke to a group of angel investors, some seasoned, some new to the game, to get their advice on how to make the change.

Overwhelmingly, for angel investors just starting out, the best advice is to join a group. The Australian Association of Angel Investors keeps track of groups, mostly in metropolitan centres around the country. Other groups, such as Innovation Bay in Sydney and Aurelius Digital in Melbourne, which both focus on technology start-ups, are also proving popular.

The benefits of investing as part of a team include having access to a broader range of skills, experience and opinions, which helps to build a diverse portfolio. “I have several investments in IT [information technology] yet I don’t know a lot about IT but some of my co-investors are very good in that space. I take the lead from them,” Brisbane angel and life sciences entrepreneur Jim Kalokerinos says.

Brokering a relationship with an entrepreneur is much easier with a team, especially when some hard truths need to be discussed,

Gold Coast-based Founders Forum chairman Rick McElhinney says. “If you’re by yourself and you wreck the relationship, it’s game over.”

Individual angel investors – “unless it’s a well known personality or a James Packer kind of person” – might struggle to get access to deals, Sydney Angels member Mathias Kopp warns.

This is problematic for quantity and quality. “Sydney Angels has a very stringently designed screening process,” he says. “Capable people look at the deals and screen out those that are not investor ready.”

How much a newbie angel investor needs to have in the bank before getting started is up for debate. “It’s what you’re most comfortable to put at risk and that is extremely subjective,” Australian Association of Angel Investors chairman Ruth Drinkwater says.

Kris Trevilyan is a new member of the Brisbane Angels and hasn’t yet exited a deal. “It is very exciting when deals do really well on paper but at the end of the day it is only worth as much money as you close with,” she says. “I always invest with the mindset that I don’t need the money and I can kiss it goodbye the minute I invest it, otherwise I would be stressing all the time.”

“You really need enough money to be able to lose it and have that not effect your lifestyle,” John Mactaggart, whose father Dugald was a foundation investor in software provider Technology One, says.

Over time, the family put about $800,000 in the company led by BRW Entrepreneur of the Year finalist Adrian Di Marco. The company was listed in 1999 and led to a big pay day for the family.

Mactaggart thinks of himself as a full-time angel investor. His average investment is $25,000 but says he’s parted with as little as $3000. In 2011, he made eight investments and this year has taken stakes in four companies.

But there’s no average approach. Gold Coast angel and clean technology entrepreneur Tony Le Messurier makes no more than one investment a year “because it literally takes that [time] to find the right one”.

Drinkwater made two investments in the past financial year.

Like Hetzel, investing too much in one company has burned McElhinney in the past. He has written off $600,000 invested in a software venture. “The company is still operating but an exit now is unlikely,” he admits. He now takes stakes of between $50,000 and $100,000.

It’s not an easy ride, Mactaggart reminds new investors. “If I look at my portfolio at the moment, most have come within a week or two of failure,” he says.

Members of the Sydney Angels are expected to part with at least $50,000 each year, all at once or broken into chunks as they see fit. Kopp invests in about three companies each year. He says other investors are more active but for him, more than three companies would be too time-consuming. “I take a more hands-on approach,” he says. “There are others who may invest in 10 deals a year but wouldn’t get so involved.”

The question of how involved to get is also one for personal preference.

“I get quite involved in the due diligence process,” Hetzel says, “but I only get involved post-investment in a small percentage.”

For Mactaggart, such a hands-off approach would spoil the fun of being an angel investor in the first place. “I won’t invest in anything unless I can influence it to some degree,” he says. “I suppose I don’t get any satisfaction if I can’t influence it.”

Kopp suggests that for angels who want to play a more active role it may be a good idea to get involved before signing a deal. “What I do is I [make an] offer to potential investee companies to work with them at no charge for three to four weeks – it’s pre-due diligence if you like. That allows me to get greater insight into the business and the way the founder functions.”

Once invested, the issue of follow-on funding is sure to arise. Don’t feel obliged, the angels say. For Kalokerinos, an investee company must show it is meeting agreed upon “value-adding” milestones to warrant reinvestment.

“They all get a bad luck story,” Le Messurier says, “but when it’s two to three at a time, you start to say ‘hang on’.”

No matter what risk mitigation strategies are in place, however, early stage investment has a big potential downside.

If you don’t have an appetite for risk, angel investment probably is not the right asset class for you, the angels say. “You’re never going to have zero risk and it’s all about understanding what the risk is and matching it to the opportunity and going for it,” Drinkwater says.

Nonetheless, there’s a difference between seizing the opportunity and going after anything that pitches, Le Messurier warns.

His “golden rule” is: “The opportunity of your lifetime only comes along every fortnight … [so] if it’s not right, don’t pursue it.

“One thing the entrepreneurs don’t get is they’re not competing against competitors with their product.

“They’re competing against me not saying, ‘I’ve got $20,000 on number five in the fourth’ and instead saying, ‘I’m going to invest it with you’. They’re in competition for capital.”

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