Venture investing, particularly for angel investors, is a complex yet rewarding endeavor. Understanding the foundational principles is crucial for anyone looking to succeed in this field. This article outlines the key components of venture investing, including essential terminologies, the development of an investment thesis, evaluating investment options, and guidelines for new angel investors.

Introduction to Jed Ng

Jed Ng’s journey is nothing short of inspiring. A former tech operator, he co-founded and built an API marketplace business, which attracted seed-stage funding from Andreessen Horowitz and became the world’s largest API marketplace. Transitioning to angel investing in 2016, Jed is self-taught and has achieved remarkable success, including backing two companies that reached unicorn status.

In 2020, Jed launched Angel School, an angel accelerator aimed at helping investors navigate the venture ecosystem, from writing their first check to leading syndicates as super angels. His syndicate has grown to 1,300 investors worldwide, highlighting the scale and impact of his initiatives.

Angel Master Class Overview

The Master Class, part of the Angel School initiative, aims to equip aspiring angel investors with the essential knowledge and practical skills needed to succeed in venture investing. Over three sessions, it covers foundational principles, venture math, and due diligence, providing a comprehensive learning experience that fits seamlessly into the broader Angel School program designed to support and accelerate new investors in the venture ecosystem. The following article covers the first section:

First Principles

1. Venture Math
2. Due Diligence and Decision Making

The first session focuses on the foundational principles of angel investing, providing a robust framework for newcomers and experienced investors alike.

Understanding Key Terminologies

Grasping the fundamental terminologies is the first step in venture investing. Here are some critical terms:

• Limited Partner (LP): These are generally passive investors in a venture capital (VC) fund. They commit capital but do not participate in day-to-day management.
• General Partner (GP): The individuals or entities responsible for managing a VC fund, including making investment decisions and managing the fund’s portfolio.
• Carried Interest (Carry): A profit-sharing mechanism typically set at 20%, which serves as an incentive for the fund managers. It represents the GP’s share of the profits after returning the initial capital to LPs.
• VC Fund: A pooled investment vehicle that aggregates capital from LPs and is managed by GPs. The fund typically charges an annual management fee (usually 2%) and takes a carried interest (20%) on the profits.
• Syndicate: An informal group of investors pooling capital to invest in specific deals. A syndicate is managed by a lead who sources and vets the deals, while members can choose which deals to participate in.

Developing an Investment Thesis

An investment thesis outlines the boundaries and focus areas for an investor, helping to streamline decision-making in a noisy and fast-paced market. Key components of an investment thesis include:

• Sector and Domain: Identifying specific industries or verticals to invest in, based on familiarity, affinity, and interest.
• Geography: Defining the geographical areas of focus, which can range from local to global markets.
• Stage: Determining the stage of companies to invest in, such as pre-seed, seed, or Series A. This often correlates with the amount of capital an investor can commit.

Having a clear investment thesis helps investors concentrate their efforts and increase their chances of success by leveraging their knowledge and interests.

Evaluating Investment Options

Angel investors typically have three primary channels to consider:

1. Direct Angel Investing: Investing directly into startups. This approach provides the most control but requires significant time and expertise in sourcing and vetting deals.
2. Syndicate Participation: Joining a syndicate allows investors to participate in curated deals with thorough due diligence conducted by the syndicate lead. This option offers better deal access and reduced administrative burden.
3. VC Funds: Investing in a VC fund provides a diversified portfolio managed by experienced professionals. However, this option requires a substantial capital commitment and less direct involvement in investment decisions.

Each channel has its pros and cons, and investors must choose based on their capital availability, risk tolerance, and desired level of involvement.

Direct Angel Investing

Direct angel investing involves individual investors putting their money directly into startups. This method offers the highest level of control over investment decisions but requires significant time and expertise. Investors must source, vet, and negotiate deals themselves, often necessitating a deep understanding of the industry and robust due diligence skills.

Syndicate Participation

Participating in a syndicate can be advantageous for those who prefer a more collaborative approach. Syndicate leads source and vet deals, providing members with access to high-quality opportunities that have already undergone rigorous due diligence. This approach not only saves time but also leverages the expertise of experienced investors. Members can choose which deals to participate in, allowing for flexibility and control.

VC Funds

Investing in a VC fund offers diversification and professional management. These funds pool capital from multiple investors, which is then managed by experienced GPs. While this option requires a higher capital commitment and offers less direct involvement, it provides exposure to a broader portfolio of companies and reduces individual investment risk.

Guidelines for New Angel Investors

For those new to venture investing, here are some essential guidelines to consider:

• Acceptance of Risk: Be prepared for the possibility of losing the invested capital. Venture investing is inherently risky, and liquidity events may take several years to materialize.
• Take Your Time: While deal flow is abundant, capital is finite. It’s crucial to be selective and deliberate in making investment decisions.
• Diversification: Building a diversified portfolio reduces risk. This involves investing in a variety of companies across different sectors, geographies, and stages over time.
• Focus on Skill Development: Investing in personal skill development is vital. Learning to conduct due diligence, evaluate business models, and understand market dynamics will enhance decision-making abilities.

Importance of Syndicates

Syndicates play a crucial role in the venture ecosystem by providing:

• Curation and Deal Access: Syndicate leads source and vet deals, offering members access to high-quality investment opportunities.
• Diligence Support: Syndicates often conduct thorough due diligence, reducing the burden on individual investors.
• Diversification: Participating in a syndicate allows investors to spread their capital across multiple deals, improving their chances of hitting high-return investments.

Practical Tips for Angel Investors

1. Start Small and Learn: Begin with smaller investments to understand the dynamics of venture investing. As experience and confidence grow, gradually increase the investment size.
2. Network Actively: Building a network of other investors, founders, and industry experts can provide valuable insights and access to better deals.
3. Stay Informed: The venture landscape is constantly evolving. Keeping abreast of industry trends, new technologies, and market shifts is essential for making informed investment decisions.
4. Leverage Technology: Utilize tools and platforms that streamline the investment process, from deal sourcing to due diligence and portfolio management.

Conclusion

Venture investing for angels involves navigating a complex landscape with numerous risks and opportunities. By understanding key terminologies, developing a clear investment thesis, evaluating various investment channels, and adhering to practical guidelines, new investors can increase their chances of success. Syndicates offer a valuable platform for accessing curated deals and leveraging collective expertise, making them an attractive option for many angel investors. Whether you are just starting out or looking to refine your investment strategy, these principles provide a solid foundation for navigating the venture capital ecosystem.

By adhering to these principles and continuously learning and adapting, angel investors can build a robust and successful venture investment portfolio.

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Take the Next Step in Your Venture Investing Journey

Ready to dive deeper into the world of angel investing and hone your skills? Join Jed Ng for his comprehensive Master Class on Venture Investing for Angels. Whether you’re a seasoned investor or just starting out, this master class will provide you with the essential knowledge and practical insights you need to succeed.

Register now to secure your spot and take the first step towards becoming a successful angel investor.