Brad Feld Shares His Angel Investing Strategy and Due Diligence Redefined

Bart Lorang from Full Contact, Jim Deters from Galvanize and Brad Feld are doing a pretty cool thing to encourage angel investing in Colorado. They’ve offered to host a dinner once a quarter with aspiring angel investors for an exclusive Q and A session with Brad Feld. I had the fortunate opportunity to attend and here’s what I learned:

My Most Important Takeaway: Brad’s Thoughts on Due Diligence

My biggest ah ha moment came after Brad said he “doesn’t really do due diligence” on his angel investments. For those of you who know how much importance I place on due diligence, I’m sure you can imagine the red flags I saw waving in the breeze. But….an amazing thing happened. After listening for a few more minutes, I realized that he does a fair amount of what I consider to be due diligence. Brad just defines it differently.

How Brad does due diligence

Brad doesn’t do “due diligence” on early stage deals rather he practices what he refers to as “qualified reference checking”. Here is an example:

Brad invested in Full Contact after a one hour walk with the founder Bart Lorang. On the surface, it would seem as if Brad didn’t do any due diligence, but let’s take a deeper look:

1. Full Contact was a 2011 Techstars grad. This means that Full Contact went through the Techstars due diligence process and was chosen out of thousands of applications to participate.
2. Techstars connected Bart to some of the best mentors in the country who helped hone the Full Contact business model and further validate the fact that Bart had what it took to be a successful CEO.
3. Brad has a personal relationship with many of the people who vetted and grew to respect Bart. Brad trusts them; so therefore, it was easier for Brad to trust Bart.
4. Brad interviewed Bart. After Bart was vetted through 1-3, Brad spent some time getting to know Bart as a person. He took him on a walk and talked to him on a personal level to validate the hypothesis that Bart was someone worth investing in.

So…. Brad did a significant amount of what I would consider as due diligence on Full Contact, but instead of sitting for hours getting to know Full Contact, Brad’s spent years getting to know the people who spent hours getting to know Full Contact.

Where I’ve come to on this: Better defining and honing a process of “qualified reference checking” can reduce the time spent on due diligence for both entrepreneurs and investors. While due diligence is important, focusing time on building a network of “qualified reference checkers” vs. a mob of individual investors asking the same questions can be more productive for investors and entrepreneurs.

What else did I learn??

A couple of random takeaways:

1. Brad doesn’t invest in participating preferred stock deals because he thinks they can cause future financing headaches for both investors and entrepreneurs. 
2. Brad sees a lot of 10k investments on cap tables and he isn’t too concerned with the potential of investor lawsuits or the hassle of gathering information that can arise when companies have more than a few investors. He did however, note the importance of ensuring that all investors are accredited and he thinks creating an aggregate investor LLC to handle small investments is a great strategy. He feels that compensating the manager of the LLC with cash or equity is, in many cases, a completely appropriate action, as long as the investors rather than the entrepreneurs are the ones compensating the manager.

Bigger picture stuff:

1. Brad only invests in things he “gets” and “likes”. He can’t invest in angel tech deals because of the conflict with his venture firm, so he invests mostly outside of his domain expertise. When he invests in things like “peanut butter”, he must 1) immediately “get” the value proposition, 2) “like” the product and 3) believe in the team. 
2.  The TEAM is the most important ingredient for success. No shockers here as Feld has been pretty vocal about this in the past. He said the most important thing is to determine that the entrepreneur has what it takes to be successful and is not a 1) “criminal” or 2) “flake”.

Brad’s suggestions for new angel investors:

Brad shared a road map to angel investing and to the best of my recollection, here’s how it goes:

1. Put together a budget. Figure out how much you can absolutely afford to lose on a yearly basis.
2. Plan to make investments over a five year time period. Brad first tried to angel invest with a two year strategy and has had much better success with the longer term.
3. Try to make at least ten investments a year. Even if you have to make small investments to fit your budget, diversification is key. NOTE: This only works if you have enough quality deal flow to support ten per year and keep in mind that Brad probably sees more quality deal flow than anyone in Colorado.
4. Don’t be afraid to start out slow. It’s a good idea to make sure you know a little something about angel investing before you dive in. Brad expressed,  and I agree wholeheartedly, that the angel community welcomes people who want to learn, but aren’t ready to write a check. The key is to be transparent and participate only if you have the real intention to write a check after your reasonable (I would say six months) learning curve has transpired.
5.  Adhere to forced investment pacing. Once you’ve surpassed your learning curve and — IMPORTANT — have a referral network that is delivering quality deal flow (my next post will be on how to build this referral network), try to invest about once per month or 10 times per year. NOTE: I’ve been angel investing full time for two years and I am just now almost to the point that I could comfortably make ten per year.

In conclusion, it was two hours very well spent. Thanks to Brad for his insight, Bart for his organization and Jim for hosting. I am truly humbled to be a part of such a supportive startup community.