6 tips for more successful angel investing

“Unless you are prepared to be active in your angel investment, you best consider it a donation,” BRW Young Rich member and angel investor Mark McConnell says. Photo: Melissa Adams

Mark McConnell counts his investment in web hosting and technology service provider UberGlobal as a “stand out example” of his angel investment portfolio. But he’s quick to point out that this success is an outlier. “I’ve won big and I’ve lost big,” he says.

The BRW Young Rich member – ranked 67th with wealth of $28 million in 2012 – warns that angel investing is at the “sharp end” of the risk curve. “And in some ways it should be treated as ‘corporate philanthropy’,” he says. To mitigate some of the uncertainty, McConnell has a few tips for aspiring investors.

1. Get involved – “Unless you are prepared to be active in your angel investment, you best consider it a donation,” he says. “If you want that thing to work you’ve got to be passionate about it and get involved.”
2. Past failures can foster future success – Entrepreneurs who have had a successful exit from a company they have founded might have the money to invest, but not necessarily the nous. “Just because you’re good at creating your own business doesn’t mean you’re good at picking other winners,” McConnell says. “You’ve had one win and it might have been a spectacular win, but that doesn’t make you the doyen of IT investment.” It might sound counter-productive, but an entrepreneur with a failure under his belt could be a better angel investor because he should see “the potholes”, McConnell says. “It helps if you’ve had some failings because if all you have had is winnings, I think you discount the role of good planning.”
3. Pick people – “You’re investing in a management team,” McConnell says. “You’re investing in that team’s ability to go and position their product in the market. You can have the best widget in the world but there’s got to be a market for it. I would lean towards a good management team over a good product.”
4. Fine-tune your financial skills – Often entrepreneurs, especially if they’re straight out of school (or still in school, like UberGlobal’s founder Michael McGoogan was when he started the company at 15 years), will need direction on financial metrics. Both parties should be able to talk through balance sheets, profit and loss statements and forecasts, McConnell says. “Good angel investors have a solid core understanding of how finance works.”
5. Take a portfolio approach – McConnell doesn’t invest in the nags but he uses a racehorse analogy. “Because you’re right at the sharp end of the risk curve you’ve got to have a stable of 50 horses,” he says. “No-one has got a monopoly on how to pick winners. You’ve got to have quite a large portfolio of angel investments to neutralise the losses.”
6. Research widely – Hundreds of business plans cross McConnell’s Canberra desk each year from “every man and his dog”. He would do due diligence on about six and maybe invest between $500,000 and $2 million in two. “It’s a pretty thin pyramid. Everyone’s got ideas.”

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