Soon enough, you’re going to find a startup you just can’t bear to miss out on. It’s a great feeling when you’ve found a winner to put your investment money behind.
And, once you’ve signed your name on that first check, you’ll probably find yourself feeling pretty excited. You might even be a little bit relieved.
After all, the deal-making process is action-packed. For the weeks or months that you spend weighing your options, you’ll probably find yourself thinking about it a lot. You’ll have questions to ask, homework items to complete, and plenty of correspondence to take care of.
Not to mention the fact that finding a winner in the first place is a beast of a task. If you’re feeling stuck and need some help on that front, I’ve got you covered. America’s favorite shark and I have a 100% FREE webinar that will teach you everything you need to know about sourcing deals. Just click here to check it out.
My point is, making these life-changing deals takes time. So when you make it to the finish line – the dotted line, that is – go ahead and savor that sigh of relief.
But don’t forget where you filed this one. Your work is far from over.
Eventually, every successful startup will need to raise more money. It’s just the way things work in startup-land – growth isn’t free.
And as long as you haven’t muddied the waters by acting overbearing or rude, you’ll likely be one of the first calls the founders make. (More on building your angelic reputation here.)
This is a pivotal moment. It’s a classic fork in the road – one that, all too often, angel investors fail to pay close enough attention to.
Here’s the skinny: as a company grows, your stake in it shrinks, unless you take some preventative action.
Say that you invested $10,000 into a startup’s seed round at a $100,000 valuation (more on those mechanics here). Your 10 grand bought you a 10 percent stake in that company.
Six months down the line, that same startup is raising more money – and this time, their valuation has ballooned to $200,000. Everyone agrees that the number makes sense; after all, the startup has found success in its market and expanded considerably.
Well, now your $10,000 equates to a smaller piece of the total pie. You’re down to a 5 percent stake.
You might be fine with that shrinkage, especially if you’re not so sure that the business is on track to grow much larger.
But if all signs point to a startup with unicorn potential, you could be dealing a deadly blow to your portfolio’s rate of return by watching idly by as they run their next raise.
Instead, if you see success on the horizon, you should double down your investment (also known as going pro rata) to maintain your stake. In this case, you would invest an additional $10,000 – bringing your total investment amount to $20,000… which just so happens to be 10 percent of the company’s new valuation.
In fact, great angel investors – myself included – typically set aside a chunk of money for that very purpose.
Of course, going pro rata on a deal that’s struggling is never a good idea (more on that here). But if and when your portfolio’s big winners call on you for more cash, you’ll do well to oblige.
Until next time,
One response to “Avoid this Deadly (and Common) Mistake”
May 13 2019