TRIIN HERTMANN: A New Motorbike or a Startup Investment? Angel Investing is Personal
Angel Investing is Rational and Random at The Same Time
I have been an angel investor for 7+ years now, and I love it. I do find it the most fascinating and rewarding part of my investment portfolio. But it is still the most illiquid, long-term, and absolutely unpredictable super-high-risk asset class. Do not try this at home if the words in the previous sentence totally freak you out! But if they don’t scare you to your bones, as part of your portfolio (preferably not more than 20% of your net worth), angel investing can be awesome.
With the disclaimers now out of the way, I’d like to share my personal learnings from my journey into angel investing and what it has taught me about evaluating potential investments. One of the coolest things about being an angel investor is that I can say, without issue, “how I look at it”. I don’t have to explain my decision to anyone nor get approvals from committees. This also comes with a caveat.
I have no one else to blame if I get it wrong.
I do get asked quite often about the decision criteria, and the red and green flags I consider when investing in startups. The ‘by the book’ answer is often widely known. The team, the product, the technology, the market size, the business model, scalability, and traction have to be there. Everyone in the investing industry knows these by heart. That part of the evaluation is similar for both angels and VCs. VCs also have defined criteria they must meet, depending on their mandate from their own investors and Limited Partners (LPs), such as industry type, geographic location, stage, ticket size, and so on. They have their own pen where they can play.
Angel investors are different in that sense; they basically have no limitations, except for the financial ones. As they invest their personal money, they are constrained by various factors. First of all, investing in a startup competes with all the other possible asset classes, but also with any other capital-consuming idea - an expensive hobby or a new house. That means the decisions are really personal to that specific angel investor.
After working in a few awesome startups like Skype and Wise, I believed that investing in new rocket ships was definitely something I wanted to do. It seemed a very logical, even easy, thing to do. My first three investments give a nice taste of how angel investing can go.
My first big bets
After becoming excited about investing, I started looking for my first opportunity and was invited by my friend Sten Tamkivi to join a company visit, with some other investors, to a company raising capital. I remember thinking that something was not quite right. But in my naivety, as a first-time angel, I had already gone to the bother of visiting the company, talking to the team, and many others invested…I actually did not want to look like a coward (what an amazing and constructive thought for an investor!), so I invested €50,000 into Digital Sputnik. It’s dead now, after years of agony and stress for the investors and team.
My second investment was in Montonio. I remember, after I met with Markus Lember and had coffee with him, I caught myself thinking: So that is what they mean when they talk about an amazing founder. This was the first ‘founder bet,’ and it has turned out wonderfully. Ever since then, I have always put this criteria first.
The third bet was in a Finnish deeptech that makes batteries from table salt. I’m not even sure how the deal found me; it was probably one of those phone calls from investment bankers, “Hello! So-and-so gave me your name, and we have this wonderful opportunity for you.” Today, I would definitely hang up that phone for several reasons. First of all, it sounds like a scam. Secondly, as flattering as it is, I was likely ‘referred’ so the previous person could get rid of them. And thirdly, I now know that good startups don’t use consultants for their fundraising.
But, as a total rookie, I eventually invested. Six years later, the company is still alive, begging for additional investments every six months, has a gazillion registered patents, and still has no product-market fit.
Fast forward, and today I have 40+ startups in my portfolio that mostly do quite well. I do know that there is no guarantee; in the startup world, the weather can get stormy in an instant, and nothing is certain, even big and healthy ones can fail.
So what have I learned while talking to hundreds of founders? Most of all, I have started to trust my own judgement better. It does not guarantee success, but it keeps me happy and in line with my inner peace. As I said, angel investing is very personal.
Don’t follow the FOMO
From my first (and from a few others: Hey, Planet42!) investment, the one strong lesson has been: Do not follow FOMO! It can occasionally pay off, but it should not overshadow common sense and analysis.
Is there a founder–market fit? Does this person actually have in-depth knowledge of the area they are building in? More often than not, some founders feel they can disrupt something they have only a very shallow, bystander’s understanding of. It can all come together nicely in a pitch deck, but the reality (market, users, or customers) hits later like a cold iron bar. The insider’s view and fixing something based on your own experience are often much more successful.
That has another layer as well – is there an investor-market fit? A personal question to ask myself: Do I actually have the knowledge to properly understand the potential of the business idea? If I can’t evaluate something properly, I’ll pass. Or, if the area interests me and I want to be part of the trend, I’ll invest in a suitable VC fund with industry knowledge and a mandate aligned with it.
The main reason that startups fail is that the product-market fit does not exist (on a large scale). It sounds pragmatic, but the essence of this is much more emotional. Every founder wholeheartedly believes it is out there; they would not start their business otherwise. In the angel-investing phase, most likely the pre-seed or seed stage, it is also really hard to evaluate. There may be some customers, some traction, and the team really believes the customer feedback is good. But still, the reality can reveal itself differently. Some founders believe so blindly in their idea that they think all potential customers think the same way they do. Too much love can kill you, which is why I always try to figure out how quickly founders iterate and learn as reality and data come in.
Know your customer
One of my favourite questions to ask myself and the founders is, “Does your customer have to change their current behaviour and patterns to use your product?” If so, is using your product saving them considerable time, money, and hassle? If the answer to both of these is “yes”, I’ll think about it. If the behaviour change has to happen without large benefits, I’ll pass. The worst-case scenario is when two groups of people (for example, in B2B2C startups) have to simultaneously change their everyday processes without any big wins. There are examples in human history of this working out, but I doubt I could spot them.
Sometimes all the signs are there. The startup has talked to tens or hundreds of potential customers, and most of them say yes, it’s an excellent idea, and they’ll definitely use it when you build it. This gives all the confidence and confirms the hypothesis…until it doesn’t - when you ask them to pay for it. This point falls into the vitamin/painkiller category. People may know really well what is good for them and even plan to use it, until you ask for their credit card details. Then they’ll start thinking about whether they actually need it or if they just like your product.
There is one more super important thing that's totally unpredictable. Even quite average teams can experience huge success, market pull, and growth when market timing is right. There has to be something that makes the timing right for you. Either you can spot a trend that gives you a tailwind, some technology matures enough (talk about the perfect timing of Skype!), a big crisis creates new opportunities, or something similar. You cannot really influence that moment in history, but you can be in the right place at the right time and be brave enough to jump in. These are the startups everyone is after; they can be hugely successful. The downside of this, as we know, is that it can only be properly evaluated in retrospect.
Let’s get personal
Now, getting even more personal… let’s talk about co-founder dynamics. Founder breakups or conflicts are among the top three reasons startups fail. Of course, in many cases, there are mechanisms and opportunities to save the company, especially in later stages, when the C-suite is already strong, and proper agreements are in place. But as an angel investor, understanding the relationships inside the founding team is crucial. It probably defines where the founders' main energy goes in the coming years – either into building the company as fast as possible or into dealing with inner turmoil and stress. Actually, I have never worked in a startup where co-founders have lived happily ever after (or IPO).
Then there are some very selfish and private questions, even subconsciously, that I look for answers to. Do I like these people? Would I want to hang out with them? Maybe one of the founders gives me the creeps even when he is super professional in his field. Maybe they make an inappropriate comment that I nervously laugh about, but later pass on the investment. Do I believe their story? Are they delusional in their pitch deck and growth plans? Who else trusts them with their money? Do I believe they can raise the next round? Are they able to attract top talent? Do they look at me as a human being or as a stupid wallet with a nice name on it?
The good part is that, again, an angel investor can take into account both the rational and irrational sides of a startup. We do not have to explain our decisions; they can be just as emotional or pragmatic as we like. This makes angel investing so rewarding; we can support and enable ideas and people that we really like and, hopefully, one day, also share the successes and wins.