With all the fluctuation and volatility in sectors like crypto, why does anyone invest? For the average investor, investing is a tool to put their money to work building wealth thanks to the glorious power of compounding and my favorite tradeoff: risk-return. For angel investors, like me, the investments are much riskier by nature (these are early-stage, unproven companies) and the accompanying rewards are bigger too (note: so are the losses). For most people, it’s “safer” (there are never any guarantees in life!) to invest in proven, diversified funds than to be kickstarting nascent tech startups, but when your net worth reaches a certain stage, it can be part of your strategy to allocate a portion of your investment capital towards businesses in a higher risk-return category. The catch? You’ve got to understand what you’re investing in – and not get swept away by the investment flavor of the day. Here are my top tips on how to make sure you understand where you’re putting your money – and why FOMO is a terrible financial advisor.
Top Tips For Investing With Your Eyes Wide Open
1. Know Your Financial Reality
Human beings are amazing at kidding themselves. We can justify anything. With your investments – this is crucial. Take a cold look at your financial health, know where your money is currently going, and create a real strategy for growth, preservation, emergency funds, and all that boring stuff that is way more important than getting in on a high-risk startup that you may not totally understand. Once all that’s secure – that’s when you can start thinking about crypto and blockchain and all those alluring words you keep hearing you need to be investing in.
2. Know Your Risk Tolerance
I’m by no means risk-averse. I go heliskiing. I climb mountains. I freedive with sharks. I even like some risk in my investment portfolio – that’s part of what draws me to angel investing. But, I haven’t always been an angel investor and these types of investments aren’t my whole portfolio. It’s important to be realistic about the industry you’re investing in and allocate a percentage of your portfolio that, to be frank, you’re willing to lose. Because you might: 90% of startups fail, 10 % within the first year, and even more for tech startups.
For most investors, reserving 10% of your investment capital for these high-risk investments is a good starting point. You can learn a lot and gain experience, without risking your entire financial future.
3. Take Your Time
Here’s the big one. You’re going to hear about “opportunities” every day – and the longer you’re in the tech and startup world, the more of them you’re going to find. When people come at you with flashy decks and earning projections, it can be hard to remain objective and take your time. Rushing and urgency are also tactics that can be used to defraud investors. It’s so common that the SEC publishes a list of questions to help educate investors on how to mitigate their risk when investing.
Don’t rush into anything. If you don’t have time to carefully do your due diligence on an opportunity – pass on it.
4. Go With What You Know
When was the last time you impulse purchased a car or a computer or even a pair of running shoes without doing some research? And when it comes to you – and how you’ll use something – you’re a literal expert. You understand the risks, and the rewards, and most of the time, you’re right, because you know the subject. What shocks me is how often people who read reviews before purchasing a new pair of joggers will jump into an investment where they stand to lose much, much more.
I invest in what I know. My background is in tech and, throughout my career, I’ve become deeply experienced with tech in a broad variety of industries, from healthcare to real estate to fintech, crypto, and more. At MacDonald Ventures, I get more opportunities in my deal flow than I can reasonably vet, so I have to prioritize and be laser-focused on what I know. Yes, that means I’ll miss an opportunity here and there – but I’ll also miss out on a whole lot of losses in favor of the lower-risk odds of investing in businesses I understand and believe in.
Where do you start? There are so many things you want to know about a company before you consider investing your capital, enough to warrant an article just on that subject. But, if you start with industries you know and understand, a lot of your work is already done for you. When you understand a business, it becomes much easier to decide how you want to invest in them. Some of the basics:
- Who are they? What is their mission and vision?
- Who’s on their team? Not just the founder – the whole team. A startup’s team is critical, and they need to be aligned to succeed.
- What is their solution? What consumer pain points do they address?
- Do they have a product demo? How does their solution work? Do they have any beta results or use cases? Are they strategically aligned with their target audience and market opportunity.
- Where’s the data? Do they have growth metrics, strategic partnerships, testimonials, early press, or awards?
- Do they understand their own tech? They’ve got to know it inside-out.
- How are they planning to generate revenue? KPIs, OKRs, LTV:CAC ratio…all of it. Do you understand their business model and do you believe it’s scalable?
- Who is their competition? Knowing this is as important as understanding who your market is – because they’re fighting you for them.
- Use of Funds: How will they use your funds?
- The Ask: What are they really asking for? Is it just money – or will you be able to guide and participate in the business along the way? Do they value you as an expert in their field or business?
Never Let FOMO Call The Shots
I’ve learned this the hard way – every investor has. Whether you’re facing down eager family or friends launching their “can’t-lose” startup or just want to jump in on the hot new crypto opportunity, I can promise you – the devastation of taking a real loss is worse than the feeling of missing out on a potential win. Just as flashy investment opportunities pop up, crashes like Terra Luna create insecurity and skepticism amongst investors. Because of my familiarity with this sector, the math on Terra Luna never worked out for me, but I also still believe in and am actively invested in, crypto. Don’t let buzz shake you. Do your due diligence, go with what you know, and never get dragged along by the crowd or your own fear of missing out.
Read More on Why a Great Time to Start Your Business is When You’re Broke. This is a helpful article when you’ve been knocked down.
I’m interested in finding and funding the next generation of tech startups in my focus area: solving legacy problems with groundbreaking tech. Sound like you? Reach out.
Enjoy the ride.