How to be an Angel Investor, Part 3

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These are the things I learned about Angel Investing. If you're thinking about investing in startups, either directly or via services like AngelList, my hope is that these tips can help you avoid some common mistakes.

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  • High Quality

    There’s a better link for the similar pace piece - I think Fred Wilson did a startup specific one at one point. Find later.
    - -
  • For the speculative part of your portfolio, you want to invest against the crowd. Many small losses will be canceled out by a few big returns.
    Credit for the ideas behind this graph belong to Marc Andreessen and/or Peter Thiel.
  • How to be an Angel Investor, Part 3

    1. 1. HOW TO BE AN ANGEL INVESTOR Advice for your first year as an angel investor. This presentation, and other free resources for angel investors, is available at
    2. 2. Goal for this presentation: Pay it forward (many people helped me avoid early mistakes).
    3. 3. This is not investment advice. Consult a lawyer, accountant, or financial advisor before thinking about anything in this presentation.
    4. 4. EXPERIENCE • Advisor Advised BranchOut, Hired, + others (2008-2012) • Founding Team of Involver (Acquired by Oracle, Summer 2012) • Angel Investor First investment in November 2012
    5. 5. SUMMARY • Barbell Strategy Don't commit more than you can afford to lose. • Large Portfolio Commit to doing many investments. • Power-law returns Make sure every deal has large potential upside. • Branding Know why a great entrepreneur would take your money over someone else. • Reputation Focus on improving your reputation at almost any cost.
    6. 6. Before making any investment, know what your goals are and what your plan to achieve them is.
    7. 7. BARBELL STRATEGY • Most of your money should be in very safe places, a small percentage should be subject to large risk. • You can not reasonably defend having >10% of your net worth dedicated to angel investing • Pick an amount you feel comfortable losing entirely and budget that as your angel investment fund • Assume these investments will take 10+ years to become liquid (you can not sell your shares at will, you have to wait for acquisition or IPO) Read more about the Barbell Strategy
    8. 8. LARGE PORTFOLIO • These are highly risky investments, any of which could easily go to zero • Diversify across many (20-50+) good companies in order to balance your risk • Each of those companies must meet a high quality bar - avoid any deal without very large potential upside. Here’s a strategy for maintaining a high quality bar: look for high quality co-investors, invest in companies where you know the space well, and have a high degree of confidence that the team is going to execute and succeed. • Don’t try to time the market, maintain a similar pace of investments over several years
    9. 9. A NOTE ON INVESTMENT SIZE • AngelList has investments with minimums as low as $1k; most serious seed startups have $10-25k minimums • Early on, make the same size investment in each company • This suggests that you need at least 20-40k of investment capital set aside for Syndicates; and 400k-1m for direct investment • If possible, save 1-2x for follow-on (click the highlight for a definition) — maintaining or growing your ownership in winners is the best way to maximize returns • Early on, follow on when a new, experienced investor leads a new round in the company at a higher valuation
    10. 10. A NOTE ON INVESTMENT SIZE • Power-law returns aren’t intuitive — all of your gains will be concentrated in a very small # of winners • Three out of YC’s 717 companies make up 78% of the portfolio's value • A $10k seed investment in Uber would be worth about $20 million dollars today ! Your job is to invest in the one or two deals that will generate all of your returns.
    11. 11. FINDING THE BEST DEALS • Try lots of sources of deal flow: • Cold-call investors you know and ask for help, AngelList, Startup Events, Accelerators, Demo Days • Be curious about what companies are impacting people’s lives, study what’s working and what’s missing • Invest in areas you understand well or get help from people who understand the area well • Be aware that many of the best ideas look bad early-on: • Consensus ideas are priced for low returns • All good ideas initially look trivial or impossible
    12. 12. BE CONTRARIAN (AND BE RIGHT) INVESTING WITH THE CROWD INVESTING AGAINST THE CROWD SUCCESS FUL STRATEGIES Small Returns (the safe part of the barbell) Big Returns (the risky part of the barbell) UNSUCCE SSFUL STRATEGIES Small Losses Small Losses
    13. 13. ALL NEW IDEAS LOOK BAD ENTRPRENEUR HAS A PSYCHOLOGICA L INSIGHT ENTRPRENEUR HAS A TECHNICAL INSIGHT THAT INSIGHT IS MEANIN GFUL Looks Trivial (until we all start using it) Looks Impossible (until someone does it) THAT INSIGHT IS NOT MEANIN GFUL Is Trivial Is Impossible (at least for this team)
    14. 14. Getting into deals: brand and reputation.
    15. 15. BRAND • Deals may be competitive — why would a founder take your money over a different investor? • Find ways to reliably add value (be an expert on a particular skill and advise/help the team with that) • Build your brand by sharing your insights freely (e.g. blog, tweet, speak at conferences, help VCs, mentor at accelerators) • The quality of the founders who cold call you for advice is a good test of the quality of your brand • Building a brand is easier in a niche (industry or location) — develop an investment thesis
    16. 16. REPUTATION • Your reputation dictates your access to competitive investments • Illiquid investments are long commitments, founders want to pick investors who will add the most value • Invest in good companies and add value for your founders; they will recommend you to others • How you act when you’re going to lose money is a good indicator of your reputation
    17. 17. Chris Dixon on developing a brand and reputation as an angel.
    18. 18. RECAP • Have clear motives (have a goal, and a plan) • Understand the implications of power-law returns: • Find one deal that will make the majority of your gains • Build a portfolio of many high-potential investments • Add value; earn referrals from your portfolio executives
    19. 19. Advice from Experienced Angels
    20. 20. PAUL GRAHAM “That's how you win: by investing in the right startups. That is so much more important than anything else that I worry I'm misleading you by even talking about other things.” Read this essay: • How to be an Angel Investor
    21. 21. NAVAL RAVIKANT “There has to be some reason why people will take your money instead of somebody else’s. Otherwise at the end of the day, you are commoditized and you get bid out of the game.” Read this: • How to be an Angel Investor, 2 • The rise of angels
    22. 22. SAM ALTMAN “The real risk is missing out on that one outstanding investment, not failing to get our money back on all your other companies.” “The best angel investors take bets on ideas/founders that can be really huge and cheerfully lose your money most of the time.” “Invest in a reasonable number of companies […] bias all your efforts towards attracting great founders.” “Proprietary deal flow and networks are almost over, you – and your references – are going to have to be able to explain to a founder how you’re going to help them.” Read/Watch these: • Sam Altman at PreMoney • Upside Risk • Venture Funds Fret as YC Soars
    23. 23. PETER THIEL “There is only so much we can do to help the companies in which we invest. And because of this, the act of making the investment (rather than the ability to fix things later) remains by far the most important thing to do.” “[My biggest loss was not also investing in the B round of Facebook,] whenever a tech startup has a strong up round led by a top tier investor, it is generally still undervalued. The steeper the up round, the greater the undervaluation.” Read/Watch these: • Zero to One (book) • Peter Thiel AMA • Tim Ferriss Podcast (go to 9:40 min)
    24. 24. CHRIS DIXON “[Invest in good companies and work your ass off. The next time you’re competing for a deal, tell the founder to call your prior investments]. Think of it like a video game, where you do this, and you level up. As you level up, you can invest in more companies and [can be more helpful to them].” Watch this: • Chris Dixon on Brand Building
    25. 25. JOE LONSDALE “You are betting on their drive / determination to succeed. […] Don’t bet on any team, or any fund for that matter, that is not obsessed and determined to prevail.” Read this: • Angel Investing
    26. 26. BRAD FELD “Understand the difference between 0x and 100x: I’ve had two of my angel investments return over 100x each. Since I had a strategy of investing the same amount in each company, all I needed was one 100x to allow me to have 99 companies completely flame out and return 0 and I’d still break even.” Read this: • Suggestions for Angel Investors
    27. 27. MARC ANDREESSEN “4000 startups a year are founded … 15 of those will generate 95% of all the economic returns” “if you are doing it right, you are continuously investing in things that are non-consensus at the time of investment. And let me translate ‘non-consensus': in sort of practical terms, it translates to crazy.” “We are looking for a magic combination of courage and genius .… Courage [“not giving up in the face of adversity”] is the one people can learn.” Read this: • 12 things I learned from…
    28. 28. MAX LEVCHIN “For HVF, cutting only ‘big’ checks leads to more rigorous, more exciting investments. Removing the option of mitigating risk by reducing check size means the only way to discern between investments is to thoroughly understand [them].” Read this: • Big Checks
    29. 29. MORE COMING SOON… I will update this deck with new quotes frequently. I’ll also post video interviews and other resources on the AdviceForAngels website. If you want to be notified of updates, interviews or other resources: Signup for the Newsletter Here
    30. 30. ANGEL INVESTING LIBRARY • How to be an angel investor • Part 1 - Graham • Part 2 - Ravikant • Part 3 – Willis • • AngelList Investing Guidelines • Zero to One (Thiel) • Angel Investing 101 (Singh) • Angel Investing (Lonsdale) • Intro to Angel Investing (Teten) • Black Swan Seed Rounds (Altman) • Why angels lose money… • Building an Angel Portfolio • Ten Commandments of Angel • Angel Investing • Gust Videos (1, 2, 3, 4) • Mark Suster (1, 2, 3, 4, 5) • Angel Resource Institute • Possible Insight (data driven angel analysis) • AngelConf Videos (no longer available - does this exist anywhere?) • Angel in Groups • SecondMarket Guide to Angel Investing • Startup Investing Trends • Analyze Startups Like a VC • Video: The Art of Angel Investing • There is no angel bubble • This Week in Startups with Naval Ravikant, Gil Penchina • Unconventional Investing Rules (Kraus) • Video: Becoming an Angel Investor (Conway and Maples) • 25iq “Things I’ve Learned” series (Griffin) • Angel Investing (book)