Seven critical lessons learned in angel investing

I had dinner with my good friend and Bazaarvoice co-founder, Brant Barton, on Tuesday at the new Sway in West Lake Hills (yummy) and we talked about lessons learned in angel investing. It was on my mind as I’m doing an AMA (Ask Me Anything) webinar with my good friend and often investing colleague, Josh Baer, on Tuesday, Feb. 5 from 4-5pm CT (you can sign up here). During my conversation with Brant, I distilled down to seven lessons learned (in the spirit of Lucky7, of course). Brant is reading Jason Calacanis’s book on angel investing and told me that many of these are in there (maybe all of these, I haven’t read the book), so you may want to turn to that to really dig in as I’m going to do my best to keep this post short. My hope in sharing these with you is that it ignites more angel investing in Austin - it is vital to our startup ecosystem here. We are doing better on that front in Austin than ever before, but I believe we are only scratching the surface here. And I hope these lessons have an impact beyond Austin angels and startups as well.

Capital for your business = fuel for job growth

This is a cool study from Pepperdine on job growth for private-capital-backed companies vs. those that do not receive funding. Jobs and revenue grow much faster. I believe this is primarily due to a selection bias in the entrepreneur. Like I discussed in my post on Bootstrap or VC? before I started Bazaarvoice, the hat trick for entrepreneurs is to be capital efficient but also not starve their business of growth because they are trying to protect themselves from being diluted as a primary driver versus building their business for the benefit of all. In other words, the type of entrepreneur - and their ambition - makes a huge difference in the ultimate revenue and job growth that their business will experience. VCs obviously look for entrepreneurs that want to hit a home-run and in this way everyone's interests are aligned - as long as the entrepreneur can stomach some dilution for the greater good.

The results were even more dramatic for the 1,854 recipients of venture capital. During the five years after their financing event, these establishments:

  1. Generated an increase in revenue that was $24.7 million higher (846 percent more) than non-backed counterparts. This translated into a 36.4 percent compound annual growth rate versus a 6.9 percent rate for non-funded establishments.
  2. Created 127 more new jobs (608 percent higher) than non-backed establishments —a 22.4 percent compound annual growth rate versus a 4.5 percent rate for the control group.

Here is the full study.