Lessons Learned as an Angel Investor

Between 2012-2015 I made 16 angel investments (+ 1 fund investment). With a recent exit, it seemed like a good time to look back, reflect and share. (#22)

If only it was as easy as money falling from trees :)

A few days ago I received distributions from an angel investment I made in February 2014. I don’t angel invest anymore because I now run Highline Beta, a venture studio and VC firm (so my investing is done through that), but I thought it would be interesting to reflect back on the experience.

In total, over a few years, I made 16 angel investments and 1 investment in a VC fund. My first investment was in January 2013. Prior to that I was a co-founder at Year One Labs, which made 5 very early stage investments (they all happened to be consumer companies), one of which (Localmind) was acquired by Airbnb.

I’m far from the most prolific angel investor, but I’ve done and seen enough to hopefully share some interesting tidbits.

You Have to Build a Portfolio

If you’re going to angel invest seriously (with the expectation of a return), you’ll need to make a decent number of bets. I don’t think I made enough investments myself, but I got occupied with other things, and decided to let the portfolio ride and see what happens.

Here’s the scorecard so far:

• 5 failures (one of those returned 1/3rd of the investment)

• 4 full exits (but not all great returns)

• 7 still operating (2 of which I’ve received partial exits on; more on that later)

Right now, based on current returns, I’m at ~2.5x, and based on my assumptions today, should end up between 4-5x.

My best investment returned ~11.5x, but 2-5x is more common. None of my investments to date have been absolutely humongous wins (we’ll see!)

If you don’t build a portfolio, your concentration risk is simply too high.

You’re Playing the Long Game

“The long and winding road…”

I’ve had a couple early exits (getting capital back within ~3-4 years) but most take longer than that. The most recent exit (mentioned above) was 9 years in the making. And I’ll admit something: I occasionally forgot the name of the company. I wasn’t close with the founder and I wasn’t receiving regular updates. I only knew something was happening when I received an email from lawyers telling me an exit was being finalized (such is often the case with earlier angel investors.)

When you start angel investing, you may not realize how long it takes to get your money back or generate a return. And if the return isn’t great, and you think about what else you could have done with that money, it’s tricky.

For example, let’s say I had put $100 into the startup that recently exited. It took 9 years and I received 5x return: $500.

• Had I put my money into Bitcoin (which was $549.26 at the time and is now ~$28,500), I would have made ~$5,200 (or 52x my money!)

• Had I invested in Amazon stock, I would have made $796 (or ~8x my money) and Apple stock would have returned $1,219.69 (or ~12x)

• But an S&P 500 ETF (e.g. SPY), which is doing ~12% YoY return would only have netted me $333 (or 3.3x)

The odds that I would have held Bitcoin, Apple or Amazon stock for 9 years without selling are small, so it’s not a totally fair comparison. But what’s also important to recognize is that you have no control over angel investments. You can’t decide to sell when you want.

Angel Investing is Risky

You shouldn’t pretend this is anything more than gambling. You might believe you have an insider’s track on great deals, or a sixth sense for picking winners—and maybe you do—but it’s still risky. That’s why having a sizeable portfolio is so important.

The truth is, you can never tell which startups, at least at a very early stage, are going to win. Over enough bets and enough time, you’ll probably generate a return (or at least get your money back) but you shouldn’t consider angel investing anything other than very high risk.

From rags to riches and back to rags: the story of Breather

In July 2013 I invested in Breather. I also wrote one follow-on check (which was atypical for me.) At one point in time the company was worth hundreds of millions of dollars (heading towards unicorn status) and I could picture my relaxed retirement off of a single angel investment. I was convinced that Breather was going to be my superstar! And then…poof. When WeWork struggled to raise more capital, Breather fell too (there were other reasons beyond WeWork stumbling, but that was a big trigger.) The company’s assets were acquired in 2021 and I lost my money (so did everyone.) Breather had raised ~$132M. 😭

Two key lessons:

1. You never know what’s going to win until it wins

2. The amount of funding raised is not an indicator of success

I remember someone once telling me, “Once you’ve written the check, assume the money is gone.”

That’s tough to grok, because you think you’re a genius and will “beat the market” (and again, you might!) but it helped me psychologically prepare for the write-offs.

Quick side note: If you can get out early, you probably should

If you can get out early, strongly consider it.

Every time I had the opportunity to get out early on a secondary, I’ve taken it.

You won’t always have the option, but it usually comes when a startup is raising a sizeable round and looking to simplify their cap table. The new investors may be willing to buy out the original/old investors. To be honest, if I had the opportunity to do it more often, I would. While you might be giving up future earnings on a home run, you have the benefit of putting money in the bank. If I’d been given the opportunity with Breather, I 100% would have taken money off the table.

My best return at ~11.5x came from a secondary. That return was so significant it brought me above 1x on my entire portfolio. So everything I invested came back in one deal on a secondary. (Incidentally, the company later exited in a fire sale, and investors did not generate a return; so I was lucky to get out.)

In the other two cases, I exited 100% of my position and 50% of my position. In the former (which returned ~2.3x), I didn’t have the option to let some of it ride, so I chose to get out. In the latter (which has returned ~3.8x so far), they gave me the option and I wanted to stay committed to the company. Those return multiples aren’t huge (2.3x and 3.8x) but they were good enough for me, especially as I looked at the portfolio and how long it was taking for companies to exit.

Angel Investing is a Lot of Fun

Angels invest for the warm and fuzzies (and helping founders!)

I love angel investing. Sourcing deals, helping founders, writing checks. It’s all fun. Well, losing money sucks, but that’s part of the game.

The best part for me is helping founders. I think that’s true for a lot of angel investors, because doing it exclusively for a return seems pointless. Sure, you can get a 100x return on something, but those odds are very small. As an angel investor I see myself as a facilitator and supporter of someone else’s dream, and I do what I can to help them accomplish it.

Actually, when a founder doesn’t seek out or want your help, it hurts. Angel investing is personal—I don’t need to be a founder’s best friend, but I’d like to believe they’re after more than my money. When they take the check and disappear, it’s not a great feeling. This is why I believe so strongly in writing great investor updates and consistently communicating with investors—you don’t want your earliest supporters to feel slighted (and you can probably leverage them more than you are today!)

Some of the founders I’ve invested in are more communicative than others. Some seek out my help many years later, others don’t (which is OK, I may have already served my purpose.) But when founders don’t respond to emails, or don’t have the time for a quick check-in — that’s definitely disappointing. I appreciate they’re busy, and that I wrote one of the smaller checks, but it still matters.

Warning to founders: Don’t be dismissive of smaller angel investors

I made this mistake once. I had raised $1.8M dollars from a couple VC funds and a group of angel investors. I was probably bragging about the fundraise (sigh) and then said (paraphrasing), “Thomas is an investor too, although he only wrote a nominal check.” (Thomas is not his real name.) He was also present in the conversation when I said it.

Thomas was gracious enough not to say anything at the time, but then privately he told me (paraphrasing, again), “While the size of my investment is relatively small compared to most of your other investors, it’s big for me.”

Ouch. I felt like a complete ass. I was a complete ass.

Every investor—regardless of how much they invest—is making a decision to invest in you as opposed to doing literally anything else with their money. Being dismissive of that is ridiculous. Once I became an angel investor I appreciated that so much more.

And the worst part of the story? I lost almost all of that money (I returned $0.25 on the dollar or thereabouts.) Thomas did not get a big return from me. 😔

Watching startups grow that you bet on early is an incredible feeling. I get to cheer from the sidelines for my remaining portfolio (of which I think 3 out of 7 have a real shot, but again, you can never tell!)

Angel investing at an early stage is almost exclusively a bet on the founders. When they win, your “Founder Spidey Sense” is validated. You can’t ignore the little ego boost you get when your investments are successful. (Quite a few people invest for the ego boost as well, which is fine, we’re all human. Saying, “I’m an angel investor” has some legitimate cache, although I find it’s occasionally tossed around quite liberally by people who aren’t actively writing checks.)

6 Tips for Angel Investing

I’ve learned a lot as an angel investor. Now as a VC I’m still learning, and many of the lessons apply in both cases.

1. Allocate a small % of your wealth to angel investing

Part of the reason I stopped angel investing was because I was putting too much money into it as a percentage of my net worth. General guidelines suggest 5-10% of your wealth should go into angel investing. I was definitely higher than that.

Angel investing is so fun that it can border on addictive. It’s like gambling, and you have to recognize when you’re going beyond your means.

2. Invest the same amount each time

One of the recommendations I received when angel investing was to invest the same amount each time. Of course, I didn’t do that! 😂

I typically invested between $10,000 - $25,000 per deal. I think the first few deals were on the higher end, and then I quickly realized how much it added up. So then I lowered the amount. In some cases I knew the founder more, and invested more as a result. In one case (actually the one that just exited) the founder wouldn’t accept anything under a certain amount, so I went with that.

Sticking to a standard amount takes one more decision off the table. It minimizes the complexity in deals and allows you to say clearly to founders, “I invest X amount each time, no matter what, take it or leave it.”

If you treat angel investing thoughtfully and rigorously, then investing the same amount each time makes sense. For example, let’s say you have $100,000 to invest. You know you want a portfolio of 20 startups, and so you invest $5,000 per startup. Or if you want to go with a smaller portfolio (I wouldn’t go under 10), you could invest $10,000 per startup.

3. Decide in advance to follow-on or not

Angel investors are split on this. Some, with the means, will follow on to maintain their position. Others won’t. Of course, I didn’t follow any clear rules for myself—sometimes I did follow on (4 times), most times I did not.

Even if you follow on there’s a fair chance you get crushed by future investors, unless the startup hits an absolute home run.

In 2010, two angel investors named Mike Walsh and Oren Michaels invested $5k each into the seed round of nascent transportation startup UberCab. 9 years later, after Uber went public, their $5k investments were valued at $24.8M apiece. — From Hustle Fund on how to become an angel investor

That is exceedingly rare. On a sideways exit where a startup has raised a lot of capital, you may find the multiples less than appealing by the time they get to you in the waterfall (which is how returns are calculated based on types of shares, conditions on those shares, etc.) Even if the valuation of the startup is skyrocketing (as it was with Breather), it’s hard to calculate what your actual return will be, until a deal is finalized. Even then, it’s complicated, because there can be all kinds of deal terms that affect your return (including what’s held back for performance or time commitments, liquidation preferences, etc.)

4. Have an investment focus and/or thesis & invest in what you know

How South Park perfectly described startups & investing

It’s tempting once you start angel investing to do a lot of deals quickly, whether or not you truly understand the businesses or have any meaningful insight. Be careful. Although angels aren’t necessarily going to do a ton of due diligence (Dharmesh Shah once wrote that he does none!), it still makes sense to invest in areas you’re familiar with.

Having said that, I wouldn’t overly rely on your experience either. For example, after GoInstant (where I was VP Product) was acquired by Salesforce, I started seeing a lot of startup deals that were focused on leveraging the Salesforce platform/ecosystem. I thought, “Well I know something about Salesforce, I should make more related investments.” Maybe. But it’s not as if I had Benioff on speed dial to buy these companies.

I do think it’s important to develop an investment thesis. Again, I didn’t. 😄

Having a thesis is an exercise in taking angel investing seriously and not just writing checks to a handful of friends that have cool ideas. It forces you to create a decision framework. It allows you to source more specific and most likely, higher quality, deals. If you build a thesis, you can also build a brand related to it. Maybe you’re the marketplace investor; or the vertical B2B SaaS investor; or the consumer mobile gaming investor. Having a thesis and brand will lead you to getting better deal flow earlier, and that’s critical to having a chance at succeeding.

Looking at my 16 angel investments, here’s the reasoning (as far as I remember):

• 7 of the investments were made in friends or people I knew (I did say “no” to quite a few friends raising, and that’s tough to do!)

• 1 investment was made because I had done work for the company (so I knew what was going on)

• 2 investments were made because of FOMO — 1 had a few top investors; another was a “party round” that I originally said “no” to, but then changed my mind (we’ll see if this one pays off!)

• 1 investment was made in a company related to book publishing (I’ve published a book, so thought I could be helpful)

• 2 investments were made because they were related to Salesforce

• 2 investments were made because I was incredibly impressed with the founders (I was impressed with all the founders I invested in, but for these two it was really the primary reason)

• 1 investment was made because I cared deeply about the space (sustainability); and I actually reached out to invest after reading about the startup

The range of investments is quite wide, and while having a portfolio is important, I didn’t have a real thesis. My portfolio is a mix of B2B (enterprise and SMB-focused), B2C and marketplaces. One predominant feature of my portfolio is that most of the startups had (or have) a business model at the get-go; only 1 investment was focused on building mass appeal before figuring out how to monetize. So:

• Invest in what you know; but don’t rely on your expertise exclusively

• Build a brand in a space / vertical / around your thesis to increase quality deal flow

5. Valuations matter

I’ve made initial investments between $2.5M and $10M pre-money. At first it might not seem like a significant difference, but it can be. The exit multiples you need to hit on those higher valuation startups can be surprising. Sometimes those are high-flying startups that are great at raising a ton of capital but terrible at returning capital. While investing at $3M into an initial pre-seed round might give the impression that the startup isn’t aiming to win big, I don’t think that’s true. But it may also not matter. If you get in early and a startup doesn’t raise a crap ton of capital, and has a smaller exit, you can still win.

Entry points (what you get in at) and exit points (what you get out at) matter a lot.

As an angel investor you’re completely at the mercy of the startup and downstream investors. You may be able to get out early on a secondary if given the chance, but most of the time you have to sit back and wait. Strategically, getting in earlier at a lower valuation makes the most sense if you can. This often comes down to brand and value-add — being well known as an incredible investor (perhaps in a specific domain or with a specific thesis) — so you can get in before everyone else.

6. Get a lot of deal flow

Look at all those deals swimming by!

Angel investing is so fun you might find yourself saying “yes” more than “no.” That’s a dangerous spot to be in. While some angels espouse the “spray and pray” model (imagine making 20-30+ investments per year for 4-5 years), even they’re going to say “no” to a lot of opportunities.

You need deal flow.

AngelList is a good source—although investing through there can feel a bit impersonal. You will see a lot of deals, which will give you signal on the market in terms of valuations, how much startups are raising, etc.

Ultimately deal flow comes from your network. If you’re angel investing seriously (i.e. you’ve put a thesis/plan in place, designed rules for yourself, building a portfolio) then you want to see a lot of things. If you’re investing very part-time and mostly to dabble, this might matter less (but I’d still encourage you to build up a pipeline.)

When you first start investing, you may find you have a trigger finger—you’re eager to write checks. I get it, I was there too, but try and be diligent about this, see a bunch of stuff first, and then make a bet. Consider writing an investment memo (of course, I didn’t do this, but I should have.)

What is an investment memo?

An investment memo is something a VC writes before investing. It’s to document the reasoning behind making the investment.

Bessemer Venture Partners has published a bunch of their memos which is awesome. Do you want to see why they invested in Pinterest? How about LinkedIn?

If you’re taking angel investing seriously, writing investment memos is a good practice. It’ll force you to think deeply about why you’re investing, and then later reflect on and learn from those investments.

With deal flow comes pressure. And this is tricky to navigate. You want other angel investors (especially those that are more experienced than you) or venture capitalists sending you their best deals. But if you say “no” to those deals, will you still get the deal flow? Suddenly you feel this pressure or FOMO kick-in to do a deal even if you’re not sure it’s worthwhile. You justify it by saying, “Well, so-and-so is in it, and they’re super successful,” forgetting that they’ve also made a ton of mistakes (since most investments are wrong.) Or you might think, “I’ll do this deal to get closer to so-and-so, because they’re a hot shot investor with a huge brand,” only to realize that most investors don’t connect a ton even when they’re in the same deal. I’ve invested alongside many top VC firms and angels, but it doesn’t mean we’re on a first name basis (I’m not important enough for the hot shots!)

Ultimately you need deal flow because you need sets and reps. Being a great angel investor takes time and practice. And if you want to improve, learn from mistakes, and generate returns, you’ll have to work hard at it. Writing the check and sending the money is the easy part—everything up to that is tougher.

Final Thoughts on Angel Investing

I feel like I’ve only scratched the surface. So let me share a few more random thoughts on angel investing:

• You can angel invest with as little as $1k. It may be primarily through AngelList syndicates (or other similar vehicles), but it’s entirely possible. You can’t expect crazy returns on small amounts, but it gets you in the game, helps you build reputation & brand, and learn.

• You may want to invest in VC funds instead. The alternative to angel investing is putting your capital into a venture capital fund. In this case you’re “outsourcing” the decision-making process to professional investors. You may still get very involved with the startups, and potentially double down with direct investments in the ones you really like.

• You may earn extra equity as an advisor. A lot of angel investors also become advisors (earning extra equity in the process.) There’s nothing inherently wrong with this, but I do watch out for angels that put in small checks and always expect extra on the side. Here are some additional thoughts on startup advisors.

• You have to let the losses go. Learn from your mistakes, but don’t hold onto them. It’ll frustrate you far too much. If you’re really overwhelmed by the losses, you shouldn’t be an angel investor.

• You should build a peer group. If you can find a small group of co-angel investors and share deal flow, experiences, etc. that’ll help a great deal. The peer pressure component of this is real, but ideally you avoid that. While you’ll need to branch out and build a bigger network, having a small group you can rely on is very helpful.