For our latest Investor Spotlight series, we chatted with John Michaelis, an active angel investor and board advisor for early-stage technology companies.
Previously John was the founding shareholder of Aurora, which became the market leader in AI solutions for the air sector before a successful exit. His business career includes participation in an IPO and two decades leading his consultancy businesses, one of which a Fortune 500 company purchased.
Before we dive in, our readers would love to get to know you better. So, can you tell us a bit about your background on how you started investing?
I arrived in my late fifties having had two exits and an IPO; I tried retirement, which lasted four weeks before I became restless! I wanted to do something new, so I decided to learn about being an angel investor; as I had considerable experience commercialising AI, I decided to focus on AI companies. I then set about building a portfolio over two years.
What startups do you invest in, and at what stage? Why do you choose to invest in these types of startups?
I like to invest pre-seed in technology (usually AI) companies where there is (i) a founder passionate about the problem they are solving (ii) a technology strategy that I believe will lead to the creation of many IPs and barriers to entry for others and (iii) I understand the value associated with the problem the start-up plans to solve. I usually invest in the first or second external round and require SEIS/EIS tax breaks.
When choosing investment opportunities, which one do you go with the most: your head, your heart, your gut, or a combination of the three? Why?
I lean towards my head; having said that, I got to know a couple of founders well in advance of them raising funds; my gut led the decision, and these are both B2C plays, which isn’t my strength.
How often do you invest in a year, and do you have a typical investment ticket size?
My initial investments range from £10,000 to £30,000; I will typically follow on in subsequent rounds, sometimes investing more. I don’t set a target for the number of investments per year.
What was the most rewarding startup you’ve invested in so far? Why?
There are a number; it’s those addressing significant societal challenges such as (i) scaling diagnosis of mental health and wellbeing issues, (ii) the proliferation of online harms and (iii) the limited societal access to wealth creation opportunities.
Making mistakes is part of the “growing pains” every successful investor needs to go through. Can you share with us one investment mistake you’ve made and the valuable lesson(s) the experience taught you?
My biggest mistake is following high-profile, supposedly successful angel investors into opportunities. Two companies I have invested in failed; interestingly, I was partially persuaded to invest by a co-investors profile.
What are some “myths” or misconceptions people have when investing in startups, particularly on crowdfunding platforms, that you’ve debunked throughout your journey?
The biggest myth is that tech start-ups lead to guaranteed riches in a few years. Many fail, and many just potter along, ending up as lifestyle companies for the founders; a few make it through to raise serious institutional funds; only a few will generate cash returns.
Investing in a diverse range of exciting start-ups is a unique learning experience and great fun; given the tax breaks available, one can expect at least 3X over five to eight years, which is okay compared to other asset classes. The investment market is sadly quite “ego” driven. I am still surprised by the lack of “objective analysis” I see by many investors (especially early-stage VC funds), which includes looking down on organisations that raised through crowdfunding.
I have backed crowdfunded ventures and am happy with each progress; crowdfunding is particularly applicable for organisations that want to build a vast community of stakeholder customers to get ongoing product feedback and referrals.
There has been much talk about the need for investors to support startup founders from minority groups. This may be obvious to you, but can you share with our readers why it’s so crucial for investors to support startups with diverse and inclusive teams?
I don’t actively seek start-up founders from minority groups as I consider each opportunity that crosses my desk on its merits. The founders I have backed are quite wide-ranging; they include men and women from various backgrounds, including folks that identify as BAME and LGBT.
What is important to me is that the team are diverse; I want to back companies that seek to operate internationally and be relevant to the broadest possible segments of society; embracing diversity also means we aren’t precluding any segments of the talent pool that we may wish to attract to the business.
Great! Now, let’s go to the main focus of this interview. What are the critical red flags you watch out for when choosing startups to invest in and why?
- Founders that are doing the project as they see it as a quick route to make money rather than solve a problem;
- Evidence of profligacy;
- Inability to articulate how they will use their chosen technology(s) and an understanding of how this use of the technology creates unique value, and
- Lack of understanding of their initial core target customer group, the problem they solve for them and the value they bring to these customers.
What would make a startup stand out and get you interested to learn more about them? Can you share with us examples to show this?
The biggest thing for me is the founder; their passion for the project, their understanding of the project, evidence of their resourcefulness and if they can win my trust.
What are the top three traits startup founders need to have to be able to launch their startups successfully? Can you expand on why you chose these traits?
1. Passion for solving a particular problem coupled with understanding the value they will bring in solving the problem. This is important as, inevitably, they will need to make sacrifices on their journey, and I want to feel that they are sufficiently motivated not to give up.
2. Resourcefulness. No start-up has the quality or quantity of resources it would ideally like. Founders need to “punch above their weight”.
3. Objectivity and outcome focus. Every start-up is an experiment to a certain extent; founders need to try something, fail fast if it isn’t work, analyse the outcome, and learn and try something else. I will never blame a founder if they try something that doesn’t work; I am less forgiving if they continue to do the same thing and fail.
In your opinion, what are the critical elements of an excellent investor-investee relationship? What tips can you give startup founders to ensure they consistently provide this with you and other investors?
Open, frank dialogue is key to building trust. Founders shouldn’t put lipstick on the pick, and investors should try not to be judgemental. Most conversations I have with founders are at the founder’s request to discuss a challenge, and we try to solve the issue together as equals.
How often should startup founders update their investors on their progress? What method is, in your opinion, the best way for startup founders to use when updating their investors?
A written shareholder update once a month or once per quarter is excellent. The best updates are those that ask investors for specific help (e.g. intros to people in name companies, introductions to potential new hires, advice on a commercial matter etc.)
Let’s flip things around. What three things can cause an investor NOT to invest in a startup, and why?
1. A founder who doesn’t listen and answer the questions asked.
2. Not knowing who the customer is
3. Being unable to articulate the value proposition
As a parting gift to our readers, what are the top three pieces of advice you can give them about investing in startups?
1. Only invest money you can afford to lose.
2. Invest in projects that genuinely interest you.
3. Trust your instincts.
Thank you for these fantastic insights and for your time. We truly appreciate it and wish you all the best in your investing journey.