Terry Cross made his first angel investment 46 years ago and has completed 45 investments. Of those, ten have "carried the freight", providing outsized returns. In the first of a series, Terry shares with us his insights on successful investments, stressing the importance of realistically estimating the addressable market for a company's goods and services.
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Terry Cross made his first angel investment in 1962. His broker at the time suggested they try a private placement since "they weren't doing so well in the public equity markets". The investment was a roaring success, producing a return of almost 40 times the initial investment in 4 years. However, not all of Terry's investments were that successful. In this first segment with Terry, we gather the following lessons learned:
- Of Terry's 45 total investments, eight to ten have produced all the return, sometimes paying out 90 to 100 times the initial investment. Twenty-five burned through all their money and died. The rest are among the "living dead" with no return expected. That boils down to a success rate on the order of 20%. A recent study of angel investments suggests that this experience is not atypical.
- Over time, Terry has learned to bet on the jockey, meaning he considers the management team critical. He's also concerned with the company's value proposition and how the company differentiates itself in delivering it.
- A chief concern in evaluating a company's value proposition is the size of the market it thinks it can address.
- If a company suffices itself with just estimating a small penetration of a very large market, that never seems to work out. The company has not determined who real customers might be.
- A real estimate of addressable market consists of actual potential customers and a reason for why they would adopt the company's product.
In future segments with Terry, we will discuss intellectual property and risk mitigation, and the process of obtaining angel investment including the pitch, what happens after, and term sheets.
Additional Links
- The Angel Capital Education Foundation lists a number of white papers about angel investing funded by the Kauffman Foundation.
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