How to think about follow-on investment strategies as an angel investor
“The secret in the early-stage is to search for winners, and that’s a discovery process. The secret to follow-on is to pile in the winners, and that’s about information, understanding what’s a winner and what’s not, and avoiding losers.”
Zach Coelius | @zachcoelius
Managing Partner, Coelius Capital
Zach’s three things to keep in mind about follow-on investing:
- Understand that early-stage investing and follow-on investing have very different return profiles and practices, so you should have separate strategies for each
- Follow-on investing is all about leveraging your information. If you have information rights or insights into important data, you can make the decision for yourself. If you don’t, you need to use proxies (which firm is leading the next round, etc.)
- As an angel it’s not your job to keep the company alive. It’s okay if it goes out of business.
Jason’s advice:
- Bridge financing: Make sure it’s a bridge to somewhere and not a dock
- Bankroll management: If you’re placing small bets ($1K-$3K on average), you need to get to 25 bets to have diversification
- Example: If you have $100K to invest in startups (money you can lose!) Start out with 25, $2K bets. Assuming 5 investments meet your follow-on criteria, put $10K in each for follow-on. This way you have put 60% of your money into the 5 best companies. (5 x $2K, 5 x $10K)
