Why Business Angels Should Join Twin Path
On the 15th of June we will be launching our new pre-seed fund Twin Path to invest in UK based founders building innovative and disruptive AI first businesses. For me personally it would be my third fund as partner (after LCIF and AI Seed), the first where I am full time and fully committed. I am even more confident, that like those funds, Twin Path will succeed in generating industry beating returns to our investors. Through AI Seed and LCIF I was able to invest in the pre-seed rounds of ground breaking startups like Rahko, Face-off and Odin Vision who went on to achieve spectacular early exits whilst being the first cheque investor in startups like Hackajob, Craft, 9Fin, Flox, AI Build, and Hazy who in recent months have swum against the strong negative market tides to raise very good Series A & Series B rounds.
At my last fund AI Seed we wrote our last cheque in March 2020 ( just before COVID broke in the UK), so the question remain's what have I been doing for the last 3 years to keep my "oar in"? - The answer is angel investing.
I originally began angel investing in 2012. Then a small exit from a previous startup I founded, had left me with a small pot of cash to invest, and resisting the pressure to invest, like the rest of my UK peers, in "buy to let" property, I decided to take the plunge and become a business angel. Consequently I invested over the next 3 years in 8 startups ( cheques as little as £5k and as large as £40K) and the results... Well on the positive side some of the founders I backed such as Alex Siljanovski FRSA, Nicholas Russell, Alastair Moore and Jordan Schlipf remain good friends and colleagues (way after their respective startups ceased) as have some of the people I invested alongside such as Isabel Fox (who I invested alongside in David Plans startup Biobeats that went on soon after to be acquired in an all share deal by the resilient and increasingly impressive Huma). In fact the only business I invested in that period that survives in tact to this date (and which is fact thriving) is led by another friend Kishan Gupta and that is the amazing UXCam. (More of that later).
In short, the main lesson I learn't in that initial period of my business angel life (beyond that in angel investing it is so easy to lose money) is that when it comes to investing for the purpose of making returns in in pre-data, pre-product market fit startups, I knew nothing.
In December 2014 we launched the London Co-investment Fund and too avoid even a whiff of potential conflict of interests I decided to stop angel investing. In truth I took the opportunity presented by co-managing LCIF to learn how to invest in pre-seed and seed stage startups. This is what I leaned
Sourcing a pipeline of potentially good deals is more difficult and time consuming than you think. Friends, Family and Fools first cheque investments are often ridiculed by professional investors because they are investments based on love and trust in the founders (and on occasions the hyped space they operate in) rather than any real evidence or even signal that they might return money. I think there is nothing wrong in investing on trust (as previously mentioned my original angel cheques were in founders I mostly previously knew and since 2020 I have angel invested in Naré Vardanyan startup Ntropy and Madeline Parra startup Purple Dot who are both my friends and also have fantastic startups that have attracted significant follow on funding) but I do now believe that friends and family is likely to be too narrow group of people in which you can find amazing potential investment opportunities. This is the real reason that investing in "Family and Friends" rounds can make an investor a fool. In practice you need a very deep and wide pool of startups to find a good investment opportunities. Probably you need to see around 100 startups to find a good one and at least carry out some form of due diligence with between 10-20 startups before you make a commitment. Not only is sourcing wide and deep a numbers game but also the more startups you see the better your understanding of what is going on in the wider startup economy, the better understanding you will have of the challenges and opportunities in the market place and the more likely you will be able separate the insightful founders from the bullshitters, to see the signal from the noise. Smart business angels can use the 3 main methods (beyond changing your status on LinkedIn to business angel investor and seeing what the wind will blow your way) used by VC's to sourcing deal-flow. They are:
A) "Farming"- which involves working closely with quality universities, accelerators, incubators or investment ready programmes (The Barclays Funding Readiness programme run by my old firm Capital Enterprise is by the biggest pre-seed deal flow pipeline in the UK) in order to get first (sometimes exclusive)looks at the dealflow of pre-seed and seed deals they generate. The key for this strategy to work is to invest quickly and often. My previous role as CEO of Capital Enterprise ( and now my Twin path colleague Katie Lockwood role as Head of Investment at Capital Enterprise and my colleague Nick Slater role as senior coach at Conception X ) means we get to see a lot potentially great startups. As an angel this mean't I got and took the opportunity to be one of the first investors in Meryem Arik the co-founder of TitanML , Dr Dom Pimenta M.D. the co-founder of Tortus AI and Alistair Pullen the co-founder Buildt AI respectively farmed from the likes of Conception X, Entrepreneur First and Y Combinator.
B) Hunting : A popular method used by late stage funds which involves mining databases, the web or social media to find potential deal flow and cold calling/ emailing/ direct messaging the founders to see if they are interested in your money. Works well when there is data on the startup such as previous fund raising history but unless you believe the only pre-seed and seed ventures worth looking at (which unfortunate some in my view misguided VC's do) are founded by exited entrepreneurs or people working in the c-suite of big Tech or Series B+ scale-ups then a pretty useless exercise for angel to engage in. I have invested in exited founders new ventures such as Guillaume Bouchard new business Checkstep. But to be fair this has not been through hunting but because I invested in his previous startup Bloomsbury Ai that was acquired by Meta and have kept in touch.
C) Networks: The most popular and probably productive way of sourcing deal flow of pre-seed/ seed stage deals is building a network of people who can refer deal flow to you. Fellow investors ( angels and VC's), people active in the startup scene such as advisors, lawyers etc, paid professional deal flow sourcing agents (the best rarely see much worth in receiving the small commission fees from sourcing deals that raise less than £2m)or portfolio startups you previously invested in (the best source channel in my view) will generate you deal flow. But the truth is it will take time (and a lot of coffee and expenses) for you to build up a network that can generate a sufficient number of potential investment opportunities that can make you money. Most of our best deals from AI Seed including the likes of Causalens, Bluezone, Sparkbox and Robok came through good networking and networks.
Which bring me to the main point. The best startups choose their investors not the other way round. A big mistake that angel investors make is assuming that because pre-seed startups ask for and need money, that you are in the position of power, that you like a medieval monarch can bestow or grant your money to whoever is most convincing, deserving or trusting and by doing so make good returns. But the truth is if you want to make good returns then you need to avoid obvious emotional pulls and invest in teams that have"what it takes" to build a valuable company. To that extent what is it about you that would attract the best founders to reach out to you, to ask for money from you or to take your money over others if the round is popular or over-subscribed. A lot of that is about building up a reputation that demonstrates that you know their space like the back of your hand and the needs of an early stage company like no other. In my case this has been in AI and was the reason that Lakestar VC personally introduced me to Hans Melo the co-founder of Menten AI a state of the art AI in Drug Design startup who I subsequently invested in or why Jonas Schneider the ex-tech lead at Open AI and now co-founder of Daedalus the leading AI enabled precision manufacturer in Europe accepted an angel cheque from me last year. Even in these hot deals the fact that you are experienced in supporting similar teams reach their objectives including raising future rounds, that you have the money and intention to invest, that your name and connections can attract more money to this round, that you can act quick (including always having the time to get back to them quickly), that you add credibility to their claims to be disruptive, and that you may potentially add value or at least cause no harm are compelling reasons for you to be an investor in their hotstart-ups . Building this type of reputation takes time. Being able and willing to put together a consortium of fellow angel investors willing to invest together in amazing startups like UK's leading Cancer Vaccine development startup Infinitopes ( which I did in 2021) takes considerable effort and time but without that effort I doubt we would of been invited to invest.
2. Selection is hard to get right - A VC friend and mentor once told me that selecting who to invest in after you filter down to a small shortlist is both the most important and hardest thing to get right in investing. In fact most investors who have been investing for sometime will be monitoring whether their anti-list ( those startups they passed on) looks much better than their actual portfolio. I think my recent investments are looking better than my anti-list ( it is certainly better now than a few years ago) and although I will get in wrong ( this is why at pre-seed it is always wise not to over-concentrate and to spread your investments in a fair number of deals) I think these hard learned lessons help me select better:
A: Getting to know the Team and what is "founders fit" and what is not is vital - Team is as important as everyone says and I always seek to invest in individuals who are much smarter than me particularly on their specialist subject matter - "how they with the capabilities, insights, unfair advantages, SMART plan and your cash will achieve, for their startup, product-market fit within the next two-three years". But it is important to remember smart people often do stupid things and often an experience investor can see the avoidable bear traps ahead before the founders can. So being "open to learning" and actually appreciating feedback (rather than enduring it) I think is a good signal in a good founding team, as well as being a positive factor in good founder dynamics and the ability to recruit outstanding people. Founders falling out because they do not trust each other or because of unreconcilable objectives/ differences is a form of self sabotage that probably is the most disappointing reasons startups can fail or fail to scale. Spending time on getting to know the team in order to spot these signals is therefore vital.
B: Better understanding what is and what is not "Market Pull" and subsequent whether a few pilots are really market validation or just a validation that the founders can hustle (which is great but not proof of market pull). I think it if a team is going through the risk of building and bringing to market something innovative and in need of upfront third-party investment, then it beholds them and you as the investor, to know whether there is really is potential demand and whether if the product delivers what it promises (admittedly a big if) then it can create a big enough value uplift for the user, customer, customers customer. If there is no potential big value uplift then why should customers take the risk of adopting something new from someone previously unknown and untried is something I think about. Although I do believe that "Traction" is an important signal of a teams ability to achieve P/M fit, the quality of that traction and what it represents (i.e. is it recurring and/or a product of a repeatable, economical efficient and scalable marketing and sales process) is more important.
C: Understanding that almost everyone is a milestone investor at pre-seed.You are mainly investing to get your portfolio startups into a position to raise subsequent investment in 12-18 months time or be able to cashflow a growth strategy without further need of further equity finance. The trick is to reverse engineer where they need to be, as they approach the end of their runway to raise follow on finance (or self finance) and then to make an assessment, given the skills of the team and the resources they have, whether they have good chance of getting there. Running out of runway before the startup lift's off is a real issue, and after you invest that issue is as much the investors problem as the founders. So not only understanding this is important but also being able to having good and active relationships with follow-on investors or source of growth funding, or customers is a must if you are going to actively help and reduce this risk.
D: Due Diligence is an active and participatory process. Due Diligence is where you learn not just about the capability of team, the attractiveness of the market and the challenges/ opportunities ahead if the startup is going to win, but you also learn about about what really excites you, your own tolerance for risk and how to price for that. Again the theme of it takes effort and time means due diligence is difficult to fit around a FT job and active life. Furthermore knowing how to price risk and get a fair market valuation for your investment in a startup is not easy unless you see a lot of deals and have a good idea what other investors are willing to pay now and in the future.
E: Understand your own limitations and objectives. Probably the most important lesson for angels is to know your limitations. Are you really able and willing to follow your money and continue to invest in your winners often over a long period? If not then not only will you see heavy dilution but with prevalence of aggressive "participatory liquidity preferences" imposed by later stage VC's, you are likely to see little or no returns from the few startups that do eventually succeed in achieving an exit . So if you are selecting for returns it might be a lot better to select investments that can have a prospect of an earlier pay out. Alternatively a strategy that backs startups that do not need substantial and ongoing funding to achieve both substantial growth and shareholder returns from the cash they earn.
3. Support the startup post investment is important. I know investors who believe being able and willing to offer support is over-rated. They point out that the best thing you can do is to pick great teams and then get out of the way. I believe if you are fully aligned with the startups objectives and the founders have the experience and knowledge to get on with it, then the ability of a pre-seed/ seed investor to actively support the start-up is at best optional. But if you are not able to dedicate the time and effort to support post investment then you can never lead and are therefore heavily dependent on being invited in by both the startup founders and the lead investors. Therefore beyond your money (and maybe a reputation that the founders can leverage) why would you be invited in if you can't add value? In contested deals I think it is vital if you want to get into the round that you can offer specialist expertise, know-how and connections. But also being able to offer your time and advice when needed and preferable on a regular basis can also massively increases the likely success of your investments. The reason being:
A pre-seed/ seed startup is for the most part in "discovery" not "execution" mode, making quick and testable experiments on their way to finding "Product Market Fit". From the outside this can look like a "Shitstorm" but it is necessary development stage and these founders need all the help they can get from people who have some experience of navigating the "shitstorm" in order sense check their decisions, help validate their findings and give them guidance on what they do next. If you believe pre-seed startups are all about "executing" a proven playbook then probably best not invest in early stage startups especially if they are building AI.
Time is a great teacher - not everyone is a one shot success, some take time, multiple pivots and an investor that are not in hiding but can give these founders encouragement and support. Being there, turning up does help. My most successful angel investment, UX Cam took 5 years to get meaningful traction, did not get to raise their $5m seed round until 2021 but now is on paper my best investment worth north of 50x my initial investment.
Investors want to invest with investors that can help their teams. You do not need to do everything but if you can focus on what you can and can't do to help and others will invite you into their rounds.
So in summary the "Source, Select and Support" challenges of being "more than lucky" pre-seed/ seed investor is tough. Many therefore decide, like pilot fish that swim with sharks and whales, to invest alongside VC's (if and when you can) but the issue there is whether your interests as an angel can be aligned with the VC's in terms of thesis and exit horizons and whether a VC will take the effort to invite you in.
Now in my view (and I know you will think I am incredibly bias) the best solution to this challenge is to invest in a fund like my own new venture Twin Path.
Twin Path’s thesis is to invest (and when possible lead the deals) in UK based AI first startups. As the founding partner, I have been investing in AI startups since 2016 and to date I have invested in 70 AI startups at the pre-seed/ seed stage from over 2000 that I have seen and carried out Due Diligence on. This financial year we will invest around £6m in 10-12 pre-seed and seed stage AI startups, most of which we will lead, and we will continue the same pace in the following two years until we reach a portfolio off around 35 AI startups.
So if you want to invest into a good spread of the best early stage AI startups in the UK then I think we at Twin Path have a case for being your best bet. This is where I am now putting my own money. Furthermore Twin Path has a few features that I think is great for Angel investors. They are:
Twin Path is 50% an SEIS/EIS fund and 50% a scout fund for Family offices. We therefore give an opportunity for HNW's and Sophisticated Investors with money both onshore (who receive the fantastic UK tax breaks) and off-shore to invest for very little downside. Yes there are small fees ( although we forgo our 2% management fee for this years EIS fund that is still open) and yes when we return your investment in full from exits, we do take a 20% profit but that performance fee is why you know we are fully aligned with our angel investors. Small funds like Twin Path, cannot survive of the 2% management fee alone and can only make returns, like our investors, from exits. Consequently we are totally focused on sourcing, selecting and supporting startups who can returning cash to our investors. Our last fund, AI Seed that ran from 2017-2020, had 5 exits from the likes of Rahko and Odin Vision and has returned significant amounts of tax free cash back to our investors. We intend to not only to repeat this performance but beat it.
Twin Path enables and encourages our investors to invest alongside us. When we source and select an AI first startup investment we present the opportunity to our funds angel and family office investors to see if they would like to invest alongside us. We have quarterly in person meetings in London for our Twin Path investors to meet present and future portfolio startups. When it comes to investing in follow-on late seed/ series A and B rounds we transfer all our pro-rata rights into managed Special Purpose Vehicles guaranteeing our investors get an opportunity of follow-on in those startups you like and those that now have verifiable data that they are succeeding.
Twin Path is named because we are looking to find AI first startups that are building hard-to- achieve and copy AI powered technology that has been embedded in highly value creating B2B products. We have strong past evidence that once these AI products achieve early proof of product-market fit they will be either in a position to raise follow-on funding from our VC friends at very favourable share price uplifts for our investors (as happened with over 50% of the portfolio of AI seed) or take a very favourable acquisition offer from a strategic buyer that will give our investors anywhere between 5x to 30x return (as happened in 5 cases with AI Seed Portfolio). We believe this way that after 3-7 years we can exit most of Twin Path's investments and thereby return all the money to our Angel and Family office investors for a target tax free 3x return.
There are other funds that also have a similar set up and who are aligned to work really hard to get into the best pre-seed and seed deals in the U.K. and return cash to there investors. They give angel investors the opportunity to spread their money (the best proven way to get returns) whilst maintaining an opportunity to double down on those startups you like and can really add value too. The Best of both worlds. But if you want to invest in some of the best Pre-seed AI first startups then the only real choice is... Twin Path. There you are, I am biased but I am right.
Twin Path launches on the evening of the 15th June. If you an angel investor and would like an invite to our launch party or want to find out more please get in touch - john@twinpath.vc
