“How do you get started in angel investing?”
I’m often asked this question by friends who want to invest in startups. My default answer is “Don’t do it.” Angel investing can be fun, but being successful requires time, effort and learning. Most startups fail, and returns follow a power law distribution making access to deal flow critical. Many of those interested don’t yet qualify as accredited investors.
Starting today, my new response is:
Use Kiva to learn the basics of angel investing.
Kiva is a microlending platform for borrowers without access to traditional banking systems. Lenders can make loans of as little as $25 to borrowers on five continents. Funds are distributed and repaid through regional microfinance partners.
Kiva is similar in many ways to another fundraising platform: AngelList. On AngelList, entrepreneurs post a profile of their startup in hopes of attracting investments. Investors can screen startups based on factors like product/market fit, traction, team, and technology. If you’re an aspiring angel investor, Kiva is a great place to start developing your skills.
Here’s how to start on Kiva:
Step 1 – Create Your Investment Thesis
The best place to start is by developing an investment thesis. A thesis defines your investment goals. It often outlines requirements like industries or geographies of interest, revenue models, team characteristics, and risk requirements. Some investors like Union Square Ventures and 500 Startups have well defined theses, while others like Kevin Rose prefer “gut investing.” I’d encourage you to write down the types of investments you’d like to make. The exercise of considering what you value is often an enlightening one.
Here’s my very simple Kiva Investment Thesis:
I will lend to borrowers in manufacturing, agriculture, and construction. These ventures often have prohibitively high startup costs that, once overcome, can go on to employ many people. I prefer teams of founders — ambitious projects that create employment opportunities often take a team to create. To reduce risk, I would like borrowers with domain experience over those without.
Finally, I’m grateful for having grown up in a country with subsidized education. My computer science degree has allowed me to create an immense amount of value. As such, 25% of my loans will be allocated to individuals pursuing an education in a STEM field1.
Step 2 – Screen Deal Flow Based on Your Thesis
Once you’ve developed your investment thesis, it’s time to begin filtering opportunities through it. This can be challenging in practice. As a friend recently said to me: “I’m such a sucker for these Kiva profiles. I feel so bad.” Angel investing means saying “no” to 99 out of 100 opportunities.
Use filters to have Kiva return results that fit with your new investment thesis.
Step 3 – Deploy Capital
Once you’ve picked a few borrowers, it’s time to issue some loans. I suggest the 500 Startups-style “spray and pray” approach to lending. In other words, I prefer to make small loans to a large number of borrowers rather than a small number of large loans.
The return on an angel investment can be from [-100% – ∞%]. Interest free loans, on the other hand, range from [-100% – 0%]. There is no potential for a positive return on a loan. It’s for this reason that a highly diversified lending portfolio is the best approach. It minimizes the risk to your portfolio of a lender defaulting on their loan. Kiva is about providing access to capital for those who would otherwise be without. Each time a borrower makes a loan repayment, those funds become available to lend out again.
Kiva is a lending platform, not an investing platform like AngelList. Nevertheless, I think it’s a great place to practice disciplined investing. I find myself using a systematic approach to my loans in an effort to maximize the potential impact of each dollar loaned.
If you’re in Canada, Kiva is running a “$50 in microloans for $25” promotion on Groupon until January 31, 2013.
A $25 loan can change a life. Give one today. http://www.kiva.org/invitedby/adammcnamara