Where Have All the Angels Gone? | Hacker News Reader

Where Have All the Angels Gone?

tomtunguz.com

150 pointsgk178 comments

At least for me, a big part of it has to do with the shift almost entirely to convertible notes.

When I made my first angel investment ~10 years ago almost every opportunity was priced. Now almost everything is a note (either with a very high cap or no cap and a small discount).

I like to know what I’m buying.

And if a startup is saying they’re going to grow 1000x in 18 months but wants to cap my return over that timeframe at 20% that seems like a raw deal considering the very high risk that they won’t be able to raise at all.

I applaud them for being able to get it done. But it’s been 2 years since I’ve made my last angel investment. I’ve allocated that money to stocks instead.

What kind of net worth should you have before considering angel investing?

> What kind of net worth should you have before considering angel investing?

Thumb in the air, angel investments should be no more than 2 to 3% of your liquid (sellable, with minimal price disruption, within 90 days) investable assets. (One should also be an accredited investor.)

So if you're cutting a $10k cheque, you should have $500k socked away in liquid investments and $1 million in total assets. If you're cutting two $25k cheques, you should be investing out of a portfolio of ~$2 to 3 million.

You probably want 10 or 20x of that. Assuming your bets are uncorrelated and all have the same standard deviation, the standard deviation (volatility) of your portfolio is going to be:

stddev_portfolio = sqrt(n)*stddev where n = # of investments

Personally, I don't think I would be comfortable with the risk unless n > 25 or something around that.

Angel investing is for everybody :)

But fits squarely into the "5% of investible assets" category, aka HIGH RISK.

Two things about angel investing I wish I'd had a better grip on when I made my first handful:

1 - Very high risk and almost impossible to pick winners out of a pool even for established investors. Wins are extremely concentrated, and most positions lose - aka it's more akin to roulette unless you have a distinct advantage. Most "professionals" - aka established super angels like Calacanis or new entrants like Ryan Hoover via weekend.fund - target 30 - 50 investments per "fund" to mitigate this reality.

2 - Successful angel investments, even when they pay off, are usually illiquid for 5 - 9 years. Secondary markets are still being established and unless you manage to invest in Uber it's unlikely that you'll even have that opportunity.

>Angel investing is for everybody

So as with the desperation of crowdfunders retweeting themselves every 15 minutes to the same followers across multiple platforms, instead of requiring those who have looted the most from society to pay their share, the burden of actual financial responsibility must fall on the shoulders of the masses.

Just exactly how were they proposing to cap your return? A safe or note with a cap is designed to cap the price you pay for shares, not cap your return.

Safes or notes without a cap are rare

No price cap or a high cap means the discount is your max return during the period between when you wire your money and the priced round. Compare that to what an Seed VC or A Round VC would look for between their round and the next.

As an angel in that scenario, you’re investing with the risk profile of a very, very early company but the return profile of a later investor.

True but there is still value investing in no cap deals: access. It gives smaller investors access to deals they normally would not have. Angels would not typically have the opportunity to join later.

It also bypasses the sometimes arcane and high friction step of trying to value an early stage company.

I think everyone here has read these points in favor of notes many times. It's the counter arguments that never get written down.

Note that access isn't very useful if the returns aren't there (see the capped return point).

Is it really true that no-cap is the new norm? Are these institutional seed funds doing no cap convertible note deals? Anyone?

I thought it was the other way around, that 5-10 years ago you could get no cap but now everyone wants it priced. Especially if the round is a big one.

Of the 500 or so pitches I have heard in the last six months in Silicon Valley and San Francisco, about ten proposed a no cap note--a few of these with a discount and a few with no discount. These were almost entirely Stanford students at a single Stanford event, so I think that was more about targeting rich alums who might wish to help new entrepreneurs at the Alma mater.

I would guess it has more to do with many of the "best" angels who would round up syndicates just raising their own funds, first from the syndicates they would round up and then others. I have several investors that fit this mold and know of a bunch of others.

I think it’s likely attributable to financial returns of angels.

One of my business school professors was a prolific angel investor. I asked him about his returns and he laughed. He said it wasn’t about the returns - by the time he cashed out, he was so diluted (or enough failed) that the ROI was far less than an index fund.

What it did give him was social capital - to say he was an angel in a famous unicorn was immensely valuable to him.

Unless you’re already rich, social capital doesn’t pay the bills.

As angel rounds can very well be 100% private deals, I have to question how complete this data is.

I can certainly believe that in the "Startupland", as they call it, seed rounds are changing. But that isn't the whole industry. Because at the same time, there is growing pushback against VC investment for small software companies, and growing pushback against the "grow fast or fail" mentality.

I know of multiple angel-backed projects just in my small town over the past couple years, that have zero news coverage. Admittedly, my small town is a bedroom community for a tech area, so we have more than your average number of software professionals here. Still, if you tell me the half dozen projects going on in my small town is outpacing the entire state of Texas... I just do not find that plausible.

I don't have any data, but I feel the sentence "Angel investors, on the other hand, seem either to be walking away or raising an institutional seed fund of their own." is one of the likely explanations.

In Denmark (where I live), most angel investors seem to have syndicated together in collectives, micro-funds and other forms of investment vehicles. This reduces the number of angel rounds on paper, but I guess a lot of the angel investments are still hidden in small funds.

One hypothesis is that it could be due to the increased size of the first investment rounds for new startups. I do believe it will make it harder for the very interesting and risky cases to succeed because instead of convincing one visionary individual, they have to convince a small fund with a management structure, a board, and an associate.

Funny question to be asked on a Y Combinator property. Angel investors were the cottage industry financial gears of the early venture landscape. As Silicon Valley matured, the factories (i.e. Y Combinator et al) got into gear. These "factories" can offer better terms--overall--in large part through their scale (e.g. alumni networks, demo day, et cetera).

It's a classic maturation story. Angels still have an edge in domains with philanthropic credentials or where such scaling advantages don't present themselves, e.g. in niche technologies or geographies.

I stopped angel investing when the “ask” jumped from $25k to $250k. At $250k I’d just as soon be an LP in a fund and spread the risk (and let the GPs do the work).

(deleted content of post)

Made an enquiry about parent's angel investing, attracted a bunch of downvoting, realise HN is not the forum for this. Apologies community!

I'm not.

Thanks anyway for responding!

That's surprising to me. I've been doing 2-3 angel investments/year in Silicon Valley (while being a full-time VC), and I've never personally seen anyone ask for a $250k min check at seed stage. FWIW all of my investments are $10k (the max that my fund allows me to invest on the side), and I don't get pushback on that 90% of the time.

On a slightly different note, minimums are rarely set in stone. If someone says the min is $100k and you come back with "ah that's a bummer, I love your company and think I can help with X and Y, but I can only afford $25k," there's a good chance that suddenly the minimum will drop to $25k just for you. At least that has been my personal experience.

I’d evaluate up to ten per year but typically only do 2-3 as well, primarily US East Coast. Fairly consistently, starting in 2015? 2016? the minimums kept creeping up, until a prospective CEO told me I'd wasted his time (he'd contacted me) when I said 25k was my limit.

I may return to it at some point but it wasn't particularly lucrative and the sense of entitlement I ran into just turned me off.

Sounds so very strange. Entitlement while asking for money...in tech, beggers CAN be choosers then?

That CEO sounds horrible. Don’t let a bad apple ruin angel investing for you.

Perhaps 'angel investor' needs to be rebranded or redefined so that it sets up expectations better..

Let's say the range is approximately $10-50k for 0.1% to 1% equity. Wonder if there's a term that can represent that kind fo range. Starter. Initial. Beginner. Micro. ..

I certainly see less of this than you, but you have a brand. I suspect that matters a lot.

Yes, but then most angels can't help you with X and Y.

Is it possible that you get a wider berth with regards to terms due to who you are and what you do?

Not a snark... genuine question.

At this point it probably helps, but I've been doing this for 6 years now and had zero brand/reputation when I started. I started w/$25k angel checks in 2013, quickly realized I wouldn't be able to afford that for more than a little while, and moved to $10k by 2014. So the reputation might help now, but I don't think it mattered in 2014, and people would still take my $10k checks back then.

What can you possibly do with $10k or even $25k in the Valley? How can these kind of money can be productively used?

If you have the opportunity to get help from lpolovets, you should jump at the chance at any minimum. What does $10k or $25k get you in the Valley... not a lot. But if you keep expenses low and have support from great people like lpolovets, suddenly you have a lot more than when you stated.

To be frank, you can use it to run a business outside of the Valley for double or quadruple the time. At that amount, you can't really afford to hire (doubly so in SF), so who cares if you have access to the "talent pool" (but we all can work remote now, so, hey).

It's less about a single $10k check. I think a better way to think about it is: what could you do if you get 10-20 angels to each give you a $10k-$50k check (for a total of $400k or something like that). Then you'd have enough capital for a few people to work full time for a year, plus you'd have 10-20 individuals who are eager to help you in different ways.

What does the startup give up to get the $10k check? 1% equity or something?

Closer to 0.1-0.2 percent. Maybe a little more if it's very very early.

My loose coalition of angel friends did a blind survey among ourselves. Sixty responses received from 700 angels, conducted in March 2018. The median check size was $25K. I do not remember the exact distribution, but check sizes of less than $10K were rare, as were checks over $50K.

That's normal, angels being commonplace 10 years ago was just a sign of industry's immaturity. Angels deal with post-tax, personal money. They are naturally handicapped. They existed only as long as the field was considered uninteresting for institutional players.

As a founder on the ground even in late 2015 (NYC), it was very hard to get a single angel check when we were trying to raise $500k. Ended up raising $2m from funds instead - which was the right thing but also very weird.

Fellow founders with companies that would have traditionally been at more "angel" friendly stages have had a similar experience recently - either funds invest or they can't raise more than $150k. Less true in smaller markets.

What we need are angel bootcamps to train up more angels. Anyone can be an angel investor, but knowing how to be an angel is the real trick.

No self-respecting entrepreneur would talk to bootcamp angels! At a minimum, an M.S. in angel investing from a Top 10 school or preferably a PhD with at least 5 years of investing in FAANG should be the minimal angel qualifications.

That can't be right. The Angel Bootcamp told me companies need Angels and there is a shortage. They said I'd even get their course at a discount as long as I gave half my profits to them for the first 2 years after I graduate.

What angels really need is a website which pre-clears the wheat and separates it from the chaff with quizzes about The Lean Startup and 0-1 because a basic literacy in the modern canon is fundamental to success.

Our bootcamp guarantees a stake in crypto/gig economy unicorn within 3 months or get your money back!

YC actually organized such a camp several years ago. While the speakers were great, I found the bottom line a little bit disappointing: don’t try to make your own decisions, the best returns are achieved by attaching your deal flow to a more senior investor.

I went to a YC angel investing workshop in March 2018. The lectures are all on YouTube. My takeaway was to try to independently consider deals, and not worry about herd mentality. Of course, there was a lot of material, ranging from YC partners, external angels, and VCs. There was conflicting information and advice about the decisionmaking process -- which is good, I think: the process is different for everyone.

Lectures: https://www.youtube.com/watch?v=7aiJlRS2i_w&list=PLQ-uHSnFig...

My evaluation template for the recent YC batch: https://alanglennon.com/2019/03/15/yc-w19-template/

Berkeley has Deal Camp.

https://education.500.co/berkeley/

Cue Seattle Angle Conference, this is exactly what that group does

> Seattle Angle Conference

So they teach you how to be one of those lousy angels who shoot angles all the time?

I think part of it is the increase in cost. I’ve spoken with quite a few VCs and Micro-Fund managers and generally been told a seed round is $250k minimum.

I can’t see many angel investors investing that much. This is when I can relatively easily raise that

I wonder if this is more accurate for what people are pursuing as businesses as well where the up front costs are just higher. Trying to start a Reddit or Facebook class site just needs a working server and some basics, where as a lot of the gig economy ideas/things-as-a-service ideas like Uber or Blue Apron need more up front capital that can't be solved by just trading sweat for marketing/growth. Not because that this is the best business idea but I can imagine a lot of proposals are trying to chase similar things. I'm not saying that those who may be considered copycats are wrong just that their upfront costs might be higher. A business starting out that is similar to an Uber or Blue Apron kills its growth if it has no money.

I have also been hearing about people that are chasing WeWork as well so there is an upfront cost of facility that is almost explicitly what-not-to-do from the prior generation startup handbook: don't have an office. If an office is the product, then what? You do need a bit more money.

It definitely feels like the last few years of startups are chasing very different goals that an influx of $25k (as suggested here) isn't going to help enough to solve the overhead of getting that $25k.

I wonder if it's because 95% of angels lost their money during the peak periods so have moved on to other pursuits.

Hm, neither the article, nor anyone yet in the comments, has mentioned crowdfunding, a.k.a. Kickstarter et al...

This article is old, but shows CF passing angel four+ years ago:

https://medium.com/startup-grind/trends-show-crowdfunding-to...

I started a "creative venture studio" back in 2017 and we are mostly investing through a mix of sweat-equity and cash.

That's actually going surprisingly well. Slowly but surely and I now have a number of equity stakes in various startups some of them quite promising.

I find that one potential source of confusion is in the definition of “seed round” . How many companies actually go from no capital raised to a $2M institutional round vs. how many raise a so-called “pre-seed” or “angel” round before the institutional round?

I would imagine part of it is how much comp has risen for developers. If a couple founders are trying to raise 50-100k I would wonder why they couldn't get the cash themsevles by working for a big tech company and being frugal with their RSUs or by working the salt mines of contract development...

Seems to me like institutional investors have increased prices for startups beyond what most angel investors could reasonably compete with. And I would argue this is due to the ongoing low interest rate environment where investors are desperate for yield and cash is plentiful.

> Angel investors, on the other hand, seem either to be walking away, or raising an institutional seed fund of their own.

I guess I'm unclear what does and doesn't count as an angel investment here. This would be more useful if it included a definition.

I wonder if the cryptocurrency bubble also soaked up a lot of money that might otherwise have been playing in the angel investing market...

This round of IPOs will for sure create a new class of Angels...already many early employees who have sold on secondary markets are as is.

The weakening of patents plays a big part in this. Early stage funding in Silicon Valley once was aimed at a working model and a patent. Angels could afford that. If you have to compete by buying market share, it takes much more money upfront.

How have patents been weakened?

The Supreme Court Alice Corp v. CLS Bank International[0] decision made it harder to get a software or business method patent.

[0] https://en.wikipedia.org/wiki/Alice_Corp._v._CLS_Bank_Intern...

Not enough rapidly expanding bubbles

Maybe part of them has invested in ICO and are now waiting for these startups to grow and return investments.

The term "angel investor" is so cheesy. It implies altruistic motives, which are fairly rare in tech compared to say art.

Maybe the shift is due to the ever expanding definition of what a start-up is. Who knows, maybe the author, but he doesn't specify any sources.

I wonder if from mid 90s to early 20s it was like art, though, or at least more like art.

Tech wasn't as big of an umbrella then. I imagine everything was a lot different, including the types of funding and the investors.

To me, it implies a magic touch. I’d agree that this is in line with some of our cultural attitudes that glorify wealth.

I suspect that it may derive from theatrical "Angels" ie those who back shows on Broadway.

I do remember whilst cramming for exams in the UK listening to the only radio program still on some guy talking about how he was going to do a show based on Ts Elliots Practical cats, I though interesting that wont work :-)

Who says it's just angels? Maybe it's a symptom of the entire economy. If you told me that curve represented the silicon valley economy I'd be inclined to believe.

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