Navigating the Climate Space as an Angel Investor

With climate tech heating up (see what we did there?), there’s been a huge influx of angel investors into the space. Unfortunately, most lack the background and context to be “great” angel investors, leading to suboptimal outcomes for all sides, especially founders.

So, we sat down with Sieva Kozinsky to help guide angels to be better investors in the climate space. Sieva is the co-founder/co-CEO of Enduring Ventures and Co-Founder/Managing Partner of The MBA Fund.

Should you be an angel investor?

To start, if you haven’t yet begun your angel investing journey, don’t. From a risk/return perspective, angel investing is a bad asset class, and the one where you’re most likely to lose money. This is especially true if you don’t have an incredible startup network to draw from and/or a ton of previous investing experience. Quality deal flow is the biggest driver of returns, so if you don’t have an advantage there, pick something else.

If you’re still leaning towards the idea of becoming an angel investor, make sure you have the funds to do it right. You should be economically free before jumping in: your home is paid off, you have no major liabilities, and you have sufficient assets to burn a portion on startups. It’s a good idea to allocate less than 10% of your investable portfolio into angel investing– even as low as 5%. This means that if you have $5M to invest (not total assets), you’re allocating just $250K to angel investments; at $10K average check size, this means you can do 25 deals before you max out.

Don’t concentrate– diversify

Your optimal returns as an angel investor will likely start happening at around 20 companies (according to Kauffman Foundation and Angelist). So, if you have that $250k to invest, you should be writing checks of around $10k. This will likely drive WHEN you invest, and that’s ok. If you’re writing $10K checks, you’re likely doing so at the idea stage. Either way, don’t place all your eggs in the same basket.

Keep in mind that you should only focus angel investments in a specific sector or vertical if you have an informational advantage that will allow you to pick winners better than others. Otherwise, focus on solid business fundamentals across as broad a portfolio as you can, to diversify risk and increase the chances of meaningful return.

In a space like climate, investors will often rationalize investments on the basis of impact potential rather than commercial viability. Don’t mix charity with business– hypothetical climate impact isn’t enough if there’s no path towards profitability and exit.

Be good to founders

The most successful angel investors have at least one of three qualities:

• Deep knowledge in a particular field
• Experience building a company in a specific area
• A successful personal brand– think online content creation, including newsletters and Twitter, to gain some name recognition

Money isn’t the limiting factor for the best VC-backed companies, so they are more likely to pull you in if you have expertise or network that can immediately benefit them. Having said that, as an angel investor, you’re a very small contributor to a company’s overall fundraising journey. For this reason, it’s a good rule of thumb to expect entrepreneur time in accordance with the amount of capital you’re investing. For example, if you wrote a $10K check into a $1M pre-seed round, don’t ask for regular meetings with the CEO.

Lower expectations don’t mean that you have to be 100% hands off; there are still several ways that you can help! You can make investor introductions, get customers on board, and you can help the company recruit quality talent, for example. If you’re going beyond that in any way, be mindful of whether your help is a distraction or not. Ask the entrepreneur if your contributions are valuable, and respect their answer– their most limited resource is their time.

The same translates to the investment process itself; i.e. the amount of diligence you require should be commensurate with your check size. For example, in a Pre-Seed round:

• A very small check (in the $5-10k range) should be signed after looking at a deck and data room and taking up a half-hour of entrepreneur time at most.
• A check between $10k-$50k should require 2 meetings max, along with access to financials and a complete data room.

Remember that, as a small check writer, you are something of a bottom feeder in the investment world (that’s ok; we all start there). This is important to understand in order to behave accordingly. Generally, you need to be as helpful as possible while being as little of a pain as possible. Otherwise, the best founders will look elsewhere and you’ll be left with the dregs.

Returns & realism

A common mistake that angel investors make is not focusing enough on returns. If less than 5% of your portfolio will perform, and your positions will likely be significantly diluted at exit, you need to make sure that every bet you take has a real potential to be a knockout ($1B+).

When choosing a company, try to judge whether they can actually hit that goal in the first place. Does their TAM and business model enable them to reach valuations in the Billions? If you're investing in an enterprise SAS business, for example, it will need $100 million in ARR to be valued at over a billion. Build a simple model and figure out how many customers they need to hit that goal. Then expand the model and go deeper:

• If the pricing isn’t firm, how much will customers need to pay in the future to hit revenue goals?
• Given common churn metrics, how will churn factor into the model?
• How fast will the company need to grow to hit your valuation targets on a reasonable timeline?
• How will competition play a role in driving these outcomes?

These are all key questions to ask in order to understand exit multiples and make an effective investment decision.

It’s unlikely that attending local tech meetups is going to give you enough quality deal flow to make you a successful angel investor (unless you live in Silicon Valley). Position yourself to get better deal flow by building your network. One way to do this is through virtual spaces (Twitter, LinkedIn, Facebook Groups, Reddit etc) where you can engage with a large community all at once.  Beyond that, there are a number of virtual conferences that are free in Climate; attending those and perusing attendee lists can give you a good sense of who’s who.

Statistically, your best bet is to invest alongside VC brand names. There’s only a handful of funds out there that are consistently good (which you can read up on on the Midas List). If you commit yourself to only investing in deals that these large funds do, you are much more likely to be successful.

Sieva Kozinsky is the Founder of Enduring Ventures. In his past life, he started a seed VC firm in several companies in areas including education and healthcare. Sieva received his Bachelor’s from UC Santa Barbara .