I know through hard experience that I’m one of the dumbest investors I know. Here are two examples: the time I cost Yasser Arafat $2 million (and lost investors another $100 million in the process) and the worst VC decision ever made (of course, it was made by me). Both happened around the same time period (2000-2001) and solidified my reputation in history as possibly the worst investor ever.

However, I learn from my experiences. After a few successful startups following that period (Stockpickr.com notably, which sold to thestreet.com in 2007) I’ve started to do more angel investing and, in doing so, have figured out a check list to help me avoid my prior mistakes. If you follow this checklist I think you can do well as an angel investor.

Everyone trashes angel investors but angels have one critical edge over VC investors: we don’t have to do anything. I don’t have to put any money to work ever if I don’t want to. I can pass on deals all day long. VCs, because its their job, often have a strong financial incentive to eventually (say, over a 5-year period) put money to work since they take fees on the money that’s out there. VCs also have a psychological reason to put money to work. It’s their job. So if they are doing a good job they often feel the need (for better or worse) to put money to work.

The Angel Checklist

  1. Invest with co-investors smarter than you. I don’t invest now unless there is a co-investor going in at the same terms as me who has significantly more experience in the field as well as experience with the entrepreneurs we are investing in. I can’t give examples in each case here but with Buddy Media, for example, I went in with many successful co-investors.
  2. Invest in CEOs who have done it before. Buddy Media is another great example. I knew Michael Lazerow because after I started Stockpickr he met with me with the possible idea to become CEO. His lock-up after selling Golf.com to Time Warner was coming to an end and he wanted something new to do. Rather than let him be CEO, I blatantly stole all his ideas and then was lucky enough to back him in the venture he shortly thereafter started, Buddy Media. He had already done at least two successful startups so I was confident he knew what he was doing. Another example is Ticketfly where Andrew Dreskin had basically built and sold the same idea before, improved on it, and started again, and had great co-investors. BAM! I couldn’t ask for anything better.
  3. Invest in strong demographic trends. 76 million baby boomers are retiring in the next few years. Other than the Internet (and subsidiary to that, Facebook alone) there’s no bigger demographic tidal wave happening in the United States. Personalized medicine is quickly becoming a standard technique for diagnosing and treating the elderly on illnesses ranging from cancer to depression. I look for companies tapping into this demographic trend and co-invest with several biotech investors who have done it successfully dozens of times over. The only thing I make sure is that I get in at their terms. Else, I get back to my mantra: “I’m too stupid to determine if this is a good value for me to get into.”
  4. Get in at a low valuation. 1-3 are often good enough. But I like the added flourish of getting a good deal. I pass on about 19 out of every 20 deals I see. Maybe I pass on more. I should keep track of the statistics, but I don’t. There’s no one way to determine if a valuation was low. Clearly Twitter was low at its first round valuation of $20 million. That didn’t seem low to me and would probably have passed if I had the opportunity. Everything depends on the size of the market, what revenues one gets, etc. Again, though, this is related to (1) above. If I can get in where the best investors are getting in, along with other favorable terms (warrant coverage, full ratchet, favorable comps compared with other valuations in the space) then I feel like I have an edge. These deals are out there. The critical thing is sitting on your hands. Again, being an angel, I don’t have to do anything.

If you have 1-4 you almost don’t have to do anything else. If I’m co-investing with Kleiner Perkins I can usually assume their team of MBAs is hard at work doing all the due diligence for me. But often, to provide an extra layer of safety, I do my own work. And here’s the due-diligence checklist. To be honest, this checklist is often more about giving me comfort that I did something intelligent since I don’t really expect to uncover anything new, but every now and then something pops up.

Due diligence checklist

  • Talk to CEO
  • Talk to heads of sales in each region
  • Talk to customers
  • Talk to end users (since sometimes the customers are resellers)
  • Do background checks on CEO, CFO, heads of sales
  • Talk to all of the other investors

Although my general rule of thumb is, I don’t want to have any meetings. You know the secret to a quick meeting? No chairs and no donuts. Even quicker? Just use the phone and stay at home. That’s my meeting of preference.

With the above checklist I actually think angel investors have a strong edge over “professional” venture capital investors. They have a strong network but good angels have a strong network too (particularly with the rise of companies like AngelList). And if you follow rule No. 1 and piggyback with the best venture capitalists, then it’s the best of every world.

And look, the more VCs who make money, the more I will. On top of that, I hope to God we have a pretty strong bubble. Go Groupon!

original article by: James Altucher