Why Business Angels Should Invest Like VCs | by Christian Soschner | February 2022

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The answer is simple:

Execution of venture capital strategies

What does it look like:

Step 1: Forget your emotions

It doesn’t matter whether or not you like a team, a story or an industry. Work on evaluating opportunities from a logical perspective and don’t get too emotional about anything.

Step 2: Eliminate all stories with less than 10x return potential in the pitch deck script.

Think like a VC – once you’re detached from the emotional choices, look at the promise made by the team.

Do you believe that a team thinking of 2-3x return potential will create a 100x return by chance?

It could happen like winning the lottery, which has a chance of 1:300 million, which is better than being alive, but below 1 in 10 CV realize.

Step 3: Put others on your shortlist

Companies that pass the filter of calculating at least a 10x minimum return potential for you, as well as being confident to provide it after a few rounds of questioning, end up on the shortlist.

Step 4: Assess the team.

Check the team.

Do they have a track record?

Were they already working in the industry? Which means contacts.

Have they ever played successfully as a team elsewhere?

Have any of them already successfully raised venture capital for subsequent rounds?

And finally: do you think the team can get through tough times together and deliver a positive result?

Step 5: Allocate only 5% of your capital in a bucket

Even if a company passes all the filters, allocate only 5% of your money in a bucket.

When I look at the stats, the average ticket sizes are:

United States 2017 — $35,000

Europe 2019 — $29,000

Many companies will also accept smaller checks, but this provides a first allocation framework for their investment allocation.

  1. Be aware that the capital invested cannot be repaid for at least 10 years and is entirely dependent on external events – you are locked in
  2. This BA investment makes sense, the minimum capital pool size that can be locked up for ten years should be $600,000.
  3. BAs with less capital – eg 200,000 should allocate 10k per company, no more.

Step 6: Define the role you want to play in business and diversify accordingly

There are different opinions on the treatment of invested companies as BAs, and all have their pros and cons.

I believe that BAs are investors and should positively promote their investments within their circle of influence. They are not the extended executive council. If they’re involved in day-to-day operations or board members, it should be a different contract.

In principle, diversifying into high-risk games is a smart thing to do, and I wholeheartedly agree with Ray Dalio on that point.

When a company creates returns, stick it in 20 other companies, which increases the likelihood of additional returns.

The fact is, building portfolios of more than 20 companies reduces downside risk without diminishing upside potential. However, there is not enough time to work with every team in the company.

That’s why — be clear about the role you want to play.

Warren Buffett called him the Punched card method, Ray Dalio Diversification. What you get as a result are

  • long-term cash assets while
  • minimize the risk of loss without
  • undermine the upside potential

Yes, it’s true. Going all-in with Tesla in 2010 would have created enormous wealth. Ten thousand dollars back then at $17 would have bought 588 shares of Tesla. The 5:1 stock split in 2020 would have made 2,940 shares of Tesla at a price today: $907.

Total return: over $2.6 million.

Just imagine throwing all your money at a tesla opportunity, or even better at private companies…

Let me remind you:

For each Tesla, you will find 9 Wirecards. The German-Austrian company Wirecard went bankrupt in 2020 after the sudden disappearance of a few billion cash in the bank.

Investors who went all-in on Wirecard went bankrupt soon after.

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