Patience, Practice, and Placing Small Bets (as a new angel)

Family Feud debuted nearly 50 years ago, and though the families change each episode, the format is largely unchanged. A polling firm calls 100 people, and collects the top answers for each question - each contestant must pick the top answers (without too many wrong answers). One family (of two) then advances to the final round, where two family members separately answer 5 questions (the same ones). If their combined score passes the threshold, they win the show (and all the money they earned). 

If you asked 100 VCs to list the top questions they receive, it would likely come down to this top 3:

1. How did you get into venture (or how do I get into VC)?

2. How do you pick investments?

3. How should I get into angel investing?

Question #3 mainly comes from prospective Fund investors and exited founders. My advice will vary, and be dependent on each situation. Some people are situated to make angel investments immediately, some are better off watching for a bit (then opportunistically doing deals), and some should stay far away from angel investing.  

Venture investing can be a great asset class, and less correlated to equity markets - it can also carry big returns (even in a somewhat short hold time). The downside is that venture and angel investments are both illiquid. They’re also fairly dependent on timing (vintage year makes a big difference), skill (finding/picking the right deals), and even luck. 

I always wanted to start my own venture fund (question #1) - but did not grow up anywhere near a country club and had access to exactly zero venture investors. While I felt confident in my thesis, I also knew that I would have to show undeniable results with my own money first. So, over 10 years ago, I wrote my first angel check. 

Over time, I continued to invest in new deals - all sourced and diligenced myself. In the beginning, I felt irrationally confident. And while I did achieve the intended results, I did make plenty of mistakes. 

While I had a decent sourcing network even back then, I did not have a lot of market intel. I did not have a big enough mental data set on valuations, exits, past deal performance, peer deals, or even fund dynamics (which funds and GPs were best for certain types of deals). Although I was borderline obsessed with venture and proving out the thesis, I also had non-venture day jobs. 

As a GP, I live and breathe startups - and literally talk to other funds and founders all day. I’m always gathering intel on everything, and now have countless data points across all sorts of industries, founder types, and exit scenarios. I’ve also seen all kinds of rounds and scenarios within all of my own portfolios. I’ll still make some wrong calls, but I'm continuing to refine everything - and still devouring as many lessons learned as possible. Now, when I pick investments (question #2), I draw on those years of lived experience. The difference is that I now have 360+ other funds to work with, a fairly large network to assist with diligence, and my energy is 100% focused on venture capital. 

As an angel investor, I always had full-time jobs - mainly for extra cash flow, and to have well, a real job. So, my days were spent living in M&A/corporate strategy (Serco), and in EIR land (AARP). While I did talk with some startups at AARP, startups were entirely too small to make a difference at Serco. As a result, most of my daytime energy was spent elsewhere. 

Most aspiring angels have daytime jobs - as lawyers, doctors, or executives. Their daytime focus is generally into non-startup, and non-venture topics. And, their expertise is often not all that correlated to venture investing (which takes a weird combination of skills and experience). 

Most exited founders have an interest in backing startups - especially after a good outcome as a founder. While they will have a lot more intel on how startups work than the average angel, and likely have at least a decent VC network, it can still be a tough short-term adjustment. Understanding startups is critical to venture investing, but it’s only part of the puzzle. Understanding venture dynamics, and having a large data set of comparable outcomes/deals is a key that unlocks a lot of valuable insights. Exited founders are much more ready to invest in startups than the average angel - but taking their time and watching for a bit (via other funds) can pay dividends (or avoid obvious losses). 

Although there is a lot of context and detail missing in a short newsletter, most of my advice can be boiled down to these top recommendations:

• Only invest money you can lose (and not lose sleep over)

• Start small, until you start seeing exits and start seeing the results 

• Avoid deals you don’t understand, and avoid deals that are completely passive (i.e. deals that have not been diligenced by someone you trust and respect, or are in your wheelhouse)

• Find a mentor who has a proven track record, and run ideas/deals by them. I had the immense fortune of meeting with Jim Hunt nearly every week for years before I ever wrote an angel check, and peppered him with questions around venture investing. Without his advice, I’m not sure I would have had the confidence, or ability to start angel investing. Even today, I still email Jim for advice, and sanity checks around deals.  

• Invest in a few venture funds first (ask for a lower minimum check size), and track the portfolios (treat it as a mock portfolio to test out your instincts) 

There are several more suggestions, depending on the individual context and situation. As usual, I could type away, and ramble on for days. But, “survey says”, I should keep these newsletters shorter, and leave room for future follow-ups.