Christopher V. Flett

The last couple of years, I’ve been building up a portfolio of companies that:

• Have a distinct offering within three niche markets
• Have the potential of being cash flow positive in a short amount of time
• Have little or no substantial debt
• Target professional women or do something to support women in the economy
• Are run by someone who understands their markets and has the horsepower to get the job done
• Can the overall idea, or any of the components, be licenced?

In exchange for an equity stake and preferred position on dividend payout, I leverage capital. Financial capital, intellectual capital, human capital, systems, networks, and know how. This type of business is often called Venture Capital. This is wrong. The work I do in this type of model is Angel Investment. People use the terms back and forth so I thought I’d lay it out once and for all. After completing 25+ of these deals, I thought that I would take a moment to illustrate the difference.

Venture Capital is someone like me using a pool of money owned by others, and leveraging an equity stake in a company. This is done to grow, flip, transform, or be amalgamated into something else. The money is almost always held in a ‘fund’ that investors put their financial resources into.  Think of it like a capitalist co-op.   There’s a lot more to it, but that is the simple definition.

.Angel investment is an individual like me using my own capital, knowledge, contacts, ideas, systems, etc. to take an equity stake in a company and co-pilot its development into a profitable model. Dragon’s Den makes itself out to be Venture Capital, but it is really Angel Investment. I found a great reference on WIkipedia that lays it out:

Angel investments bear extremely high risk and are usually subject to dilution from future investment rounds. As such, they require a very high return on investment. Because a large percentage of angel investments are lost completely when early stage companies fail, professional angel investors seek investments that have the potential to return at least 10 or more times their original investment within 5 years, through a defined exit strategy, such as plans for an initial public offering or an acquisition. Current ‘best practices’ suggest that angels might do better setting their sights even higher, looking for companies that will have at least the potential to provide a 20x-30x return over a five- to seven-year holding period. After taking into account the need to cover failed investments and the multi-year holding time for even the successful ones, however, the actual effective internal rate of return for a typical successful portfolio of angel investments is, in reality, typically as ‘low’ as 20-30%

When an Angel investor gets into play, not only could they waste their time, money, and systems, but they risk damaging their reputation with too many failed companies. That’s why Angels consider the personality as much as anything else when determining fit within their portfolio. A good person that is bad at business can be fixed; a bad person that is good at business is cancer to an Angel Investor.

Due diligence is a part of business that Angels do to try to weed out the good ideas by bad people/bad ideas by good people.

For existing businesses, I look at:

• financial modeling
• exit opportunity analysis
• research of the industry
• validation of market size
• competitive analysis
• site visits, and etc
• As a rule, I don’t buy debt as an Angel unless the model is making positive cashflow

For new businesses, I look at:

• target market identification and size
• competitive analysis
• competencies of the people involved
• industry trends
• cost of penetration
• the personality of the person with the idea (Can they get it done? Can they survive while the company is growing? Are they committed? Are they an employee (mindset) pretending to be and entrepreneur? Will they listen to the advice you give them or are they going to fight without knowing?)

At the end of the day, it is a gut cheque (using your intuition). Does this company make sense at this time, with this person, in these markets, following this plan? If all lines up, I pull the trigger. If I’m not sure, I start to pump the brakes, and if something feels really off, I hit the kill switch.