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10 questions to start angel investing in gaming

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I wrote this article for people who want to get into angel investing in gaming. Since I wrote part 1 in 2019, I’ve learned a lot about angel investing, and I want to share these learnings in this part 2 of Angel Investing in gaming.

I’ve nailed down ten questions on angel investing that any newbie angel should ask.

Why should I angel invest?

If someone would ask me “Why am I angel investing?”, it’s because I want to spend my time with entrepreneurs, helping them grow their companies. It’s really not about financial rewards. It’s about helping the entrepreneurs build their team, build their approach to product, strengthening their team and company culture, and helping them on the journey to make progress. And final, to get to profitability and beyond.

Angel investing isn’t about getting rich quick. It’s about becoming involved with startups, it’s about developing and learning how ideas become amazing businesses. The curiosity to see something develop into reality and to see if customers want to use it; there’s nothing better.

How quickly will you see results?

The bottom line is that angel investing doesn’t offer quick wins, and it’s time-consuming. That’s why you should start early and start with small amounts.

Many people think that it’s too hard to get into angel investing. Like investing 1,000 euros is not going to cut it. In Silicon Valley, it’s quite common for people to invest a few thousand at first, for a year or two. Once they start seeing results, they’d increase the check size to five figures.

When I started, my plan was to invest small amounts and learn. My long term objective is to do investing for the rest of my life, so I’m not in a hurry. I know that taking steps and figuring things out will pay off.

If you still want to see quick results, in order to start angel investing, here’s what you will gain quickly: You’ll immediately begin learning a new skill. Granted, it is a time-consuming activity to spend time with founders, to understand what they are doing and how things are developing. But this time investment is well worth it.

To learn angel investing, you need to interact with the founders from many companies, even the ones you haven’t angel invested in. That way, you’ll start to understand why something is working in one company and why things aren’t in.

How do I decide on which startups to invest in?

The best way to make decisions is to create an investment thesis, which is basically an investment strategy, and then to follow that strategy as you invest. And from time to time, make adjustments to the thesis as more information and insights are revealed.

The thesis will help you to find the right deals. Specifying what you’re looking for, what kind of founders, products, and startups. It’ll be hard to know what you want early on, so it’s important to get into investing and develop a skill of recognizing patterns of success.

The earlier you start, the better. Over time, you’ll develop pattern recognition on what seems to work in companies, regarding founder, product, timing, capital needed, etc.

My investment thesis revolves around the founders.

a) What are the founders like?

  • Why are they doing a startup? I believe in founders who don’t have an option but to start a company. They can’t function in any other career besides being an entrepreneur. Then I know that they have long term incentives that are aligned with what startups require, long term commitment. Even if the company fails, it won’t fail because the founder got a well-paying job, gave up, and went back to day job. Also, the founder will put the right amount of effort to see the project through.
  • If there are several co-founders, I expect the co-founder CEO to be the person who is in it for the long term. I’m not as picky with the other co-founders, but it makes sense to understand their alignment with the CEO.

b) How do the founders operate?

  • I’ll spend time getting to know the team. I want to observe how they approach game development and getting an early version of the game out the players, what their process is like, how they reflect, learn, and iterate their systems. Success will come as long as the team is obsessed with velocity and having better systems.
  • I love it when the founder can build an MVP game in a month, put it out on the store to see the metrics. At the same time, they’ll be hiring a team and only paying them a minimum salary, but giving them long term incentives, like stock options. They keep things lean, and they’ve realized that they’re not working for a big company with market-rate salaries. Lean is their default mode.
  • By observing how the founders operate, seeing how they develop a game concept, how they internally discuss and make decisions, and how they get the MVP out on the store, I can make an investment decision.
  • That’s it? Why not obsessing over data? For an angel investor, to come on board when the company has better than average data from a soft launch is usually too late. At that stage, the company will be meeting up with seed-stage VCs who write six-figure checks.
  • I invest in founders who rely on systems that are capital efficient. Then the great games will come, as long as the required systems are there.

c) Some possible red flags that I look out for. I think you always need to list some red flags which could pull a deal from happening.

  • The team has worked and launched an MVP, but they’re not progressively discussing the game. There’s not much evidence that they are learning about the market or about what the audience needs. There is a lack of discussion or an understanding of how they’ve gotten better at making a product that has potential.
  • The founders are often arguing, and the CEO can’t resolve these issues.
  • The founders are stuck. They’ve been working on one game for months, but they’re not moving.

To be a great angel investor, it’s good to confront the CEO about these issues and see if things can change. A red flag might not stay up forever.

To develop your thesis, you need to understand the field where you’re investing. Don’t blindly follow other angels, but build your pattern recognition for success.

I want to write my first angel check. Where should I start?

The best way to get into angel investing is to start investing with small checks. To do that, you need to build a gaming network, particularly around people who deal with startups. These include founders and investors.

One of the significant benefits of angel investing is getting to do business with the most curious, groundbreaking, and exciting people in the games industry. Angel investing is the best way to build relationships with founders in startups and with other investors. These networks of people compound over time.

How to meet the founders? You can message existing startup CEOs, who’ve already raised funding, on LinkedIn and ask if they know of anyone raising an angel round. Then ask for an intro. Here’s a blurb you can copy/paste for the introduction:

“I’m looking to start angel investing in gaming. I heard that you are looking to do an angel round. Should we meet up or have a call soon?”

How to meet other angel investors? Similarly, ask startup CEOs for intros to angel investors that they know. Here’s a blurb for that intro:

“I’m looking to start angel investing in gaming. I heard that you’ve done angel investing in gaming. Should we meet up or have a call soon to share some thoughts around investing?”

Both introductions and discussions should lead to the following point.

How do I get into angel rounds?

To get into the best deals, you’ll need to sell a value add.

What is a value add for an angel investor? It’s about how you will help take the company forwards, besides just giving them some money. 

The value add could consist of having a vast network, doing intros, helping with hires, or more. I love being involved with the company on many levels.

I’m getting involved and sort of incubating, or accelerating the startup in a sense. This approach is slow and takes time. But if you love to work with entrepreneurs, that is a great wat to show that you are helpful. At the same time, your reputation as a helpful angel will spread in the startup community.

As you work your way to being in more deals, your angel portfolio will grow, and you’ll start to attract VCs, who will want to hear about the latest companies you’re involved with. The more you work your network and apply them in the deals, it will create a repeating loop, where founders realize that you’re well connected to VCs and can leverage your connections to get into more deals.

What are the terms of an angel round like?

I remember my early days as an angel investor were about getting into deals as fast as possible. Only a few deals later, I started to pay more attention to the deal terms.

First, do you need to invest immediately after the first meeting? No. The founder might be smart, and they might be creating a FOMO (fear-of-missing-out) in your mind, that if you don’t react immediately, they will close the round. That can be true, but you should always do a few things.

a) Does the deal meet your investment thesis criteria? If not yet, how can you start working on gathering more information to meet the requirements?

b) Ask for the deal terms, especially around how much they are looking for and at what valuation. It’s quite common that founders have a sum and valuation in mind. If they’ve already gotten angel investments, it’s okay to ask what other angels have invested and valuations.

c) If you’re planning to negotiate better terms for yourself, a great place to start is the valuation. Is it too high for you? I look to get in at the pre-money valuation of about $1m since then my smaller checks will have a much better multiplier later on as the company starts to progress.

Example: The founder is asking for a $2m pre-money valuation. They’ve already raised several angel checks at $1m, but it was two months ago, and now they’ve got a game out, and they’re still waiting to see the numbers. There’s some FOMO involved here, as the numbers might be excellent, and you can’t get in anymore at $2m if the numbers turn out to be outstanding.

Personally, if the deal meets my investment thesis, I would invest.

If you’re seeing lots of new deals every week, you can start becoming picky and waiting for the right valuations. As I said earlier, it makes more sense at the early stage of your career to invest in good deals, not to negotiate on price, which is already fair.

If you are about to say yes, then conduct some quick due diligence. The most important check that you need to perform is to make reference checks on the founders and ask for the cap table.

  • Reference checks: You want to hear what other people think about the founders, especially people who’ve worked with them. Ask ex-colleagues for feedback and find out how the founders operate under stress.
  • Cap table: Ensure that the founders, who are still in the company, own the large majority of the shares. Preferably over 75 percent. The less they own, the more problems the founders will have once they start raising VC funding. Companies will go through several rounds, diluting the existing cap table by 10 to 30 percent. Sometimes founders can skip a stage or minimize the dilution to closer to 10 percent. Watch out for the ones where the company is still without revenue, but the founders own less than 50 percent.

Is there an automatic Yes, meaning that you’d say yes to investing after the first meeting? I believe there is one instance where that should always happen. When a repeat founder is doing their second or third company, these people have learned so much from doing previous companies, and if they are still credible human beings and you believe they could pull it off, write the check.

I can think of another immediate YES: investing in friends matters. It hurts later if you decide not to invest. Not only when they become a big company, but since you can bet on your relationship with this person and you know their character. Just write a small check. You at least know their personality and can de-risk the investment because of your relationship.

How should I think about constructing an angel portfolio?

As you start to invest in companies, it’s good to think about constructing different companies’ portfolios. There are two kinds of portfolios.

Concentrated portfolio: This is where you’d only have one type of company, i.e., mobile gaming companies. You can rely on industry trends, best practices, and number to back companies.

Diversified “spray-and-pray” portfolio You could be investing in mobile gaming startups, but I think it makes sense to build a more diverse portfolio. You’d have B2B, SaaS, consumer, gaming content, tools, all sorts of startups. This way you’ll gather more pattern recognition from different setups, different business models, and founder skills. You’ll start seeing how teams operate in certain situations, which have different risk scenarios.

Anyway, when you approach portfolio construction, what matters is that you are doing the work at choosing which companies you invest in. You validate the deal by working with the founders for a while. Optionally you can trust another angel who has done the legwork.

How to deal with the losses?

The power law of gaming startups is real with your portfolio. You’ll have one winner that could bring 50x your investment, a few that will come back at 3x to 5x. The rest, 80% of the deals, will fail to generate a profit. That’s why it’s essential to get into dozens of deals, and work on it for several years, maybe half a dozen, before things start to materialize.

Ask yourself regularly: Am I okay with companies failing? It can be challenging, for example, if the founder made silly mistakes with the company, bad planning, bad hires, and inadequate cash flow. The only way to mitigate this risk is to spend some time getting to know the founders and how resourceful they are.

The best way to not overthink about the risk of losing money is to always invest with similar check size and at similar valuations. I’ve made all my investments at the same check size for a year now. I’m also trying to get to a similar valuation for each of the deals.

If the check size is similar, you can treat each investment with equal loss/gain ratio: you won’t lose anything more or less in either deal. Also, you won’t need to think about putting in a random amount each time, then worrying about the ones where you’ve invested more.

If you start now, start with $1k checks. It’s an okay number at the start. Then a year later, if you feel you’ve learned a lot, go for $2k or $5k. But don’t lower or raise the amount at random. Keep it simple, and you won’t worry too much about a company going bust. It’s just one in a portfolio, and the portfolio approach is what matters.

To defy gaming’s hit-driven nature, you need to become smarter at investing in companies where you can do pattern recognition. To see a pattern emerge, I love seeing the founding team first ship a game. I’ve seen some incredible games being shipped, e.g., Clash of Clans, Hay Day, Walking Dead: No Man’s Land, so I can somewhat well observe when a team is doing their best, and best in class, to find that hit.

How do I help the startups that I’ve invested in?

When the deal is done, sign the papers and wire the money quickly. Then, try to keep in contact with the founders, help them out. Politely ask for a monthly investor update, which should be standard anyway.

You’re not expected to spend loads of time with all of the companies you’ve invested in. Here’s what I’ve observed.

a) Experienced founders won’t need much help. They’ll execute the plan accordingly, and you’ll only hear about them through the monthly investor update.

b) Expect to get pulled in. Don’t push your helping on the founders. Instead, point out where your helping and advice-giving area would naturally reside, depending on your expertise and skills. I’m a repeat founder with lots of product building expertise. Those are the areas where I get pulled into to give co-founder relationship advice, fundraising advice, soft launching advice, etc.

c) If you don’t hear from a startup in a while, it might mean that things are going well or going badly. In either case, you’d want to ping them once in a while for an update.

In any case, if for no other reason that to get better as an investor, you should find time to sit down with the founders every second month and ask some of the following questions:

  • What is working? And what isn’t working as planned?
  • What have you learned about your team? About the market?
  • What kind of systems have you developed that generate the most traction/progress for the company?
  • What are the next milestones, and what are the likely scenarios?
  • What decisions have you made? Why were they made, and what was/has been the outcome?

Use these questions and the answers you get as the basis for learning about the company and for developing your pattern recognition for angel investing.

How long will it take to make money?

Angel investing is about putting money into startups early on and then helping those startups to become successful. Angel investing is not a get-rich-quick scheme. In gaming, if you work your way to the best deals, to bet on hard-working founders, you can start seeing multiples on your investments quite quickly, at least on paper.

If you invest in a company at a pre-money valuation of $1m, and half a year later, the company raises a seed round at pre-money $4m. On paper, you’d have 4x your investment. It’s not an exit, but you can see progress.

Even a $4m company can fail. Companies with a $400m valuation can fail and go to zero. What matters is to say in it for the long term.

Are you interested in getting into angel investing?

If so, please fill out this form, and I’ll keep you in the loop of new angel investing activity that will be happening on Elite Game Developers.

For further reading, here are a few great resources on angel investing.