Why I’m Not an Angel Investor
georgesaines.com
georgesaines.com
You're at FAANG making $250k salary (plus equity). You love the idea of a startup, but dropping to $150k salary + 1% in equity over 4x years isn't entirely appealing. (Setting aside starting your own.)
At the same time, you have a network of awesome, capable people who want to start their own business. These people are motivated, scrappy, and enjoyable to be around -- i.e. the traits YC looks for, which you can recognize. You'd help them for "free" anyway.
So take the delta in salary ($100k), and invest $50k @ $5M cap for 1% ownership into two startups a year. Four years on, you've got 1% in 8 companies with preferred stock & no vesting. Your net cash salary is equivalent in both situations, plus you earned equity in FAANG. You get to live vicariously through your entrepreneur friends, avoid startup FOMO, and relish in the relative comfort of a FAANG employer.
Yeah, I think, though that this falls into the category of investing without hopes of market returns. You're just doing it for enjoyment. Nothing wrong there, though.
Someone who's worked at a FAANG has also seen how those places remain functional, which helps shape a startup's culture when growing from 10 to 100 to 1000 to 10,000 employees and (hopefully) can avoid toxic pitfalls that poison a company to a slow death with.
four years later, you've got, in all likelyhood, three dead companies, and one company that has raised another round and you've been diluted, perhaps significantly.
don't use stories to make decisions.
(FYI, I've been angel investing for 15 years over 250+ companies)
other people have posted publically: a third of companies die, an third eventually return a 1x, a third go on to offer better returns than that. tweak that based on investor skill/insight/luck. i've done better but remember pareto.
Post-revenue, post-YC seed rounds are going to be $10M-$15M+. Then again, I've also heard of companies raising at $40M+ in the last 6 months with less than $300k ARR. YMMV.
(I've only been angel investing for 3-4 years, and as a very part-time endeavor. 8 of 12 initial seed investments survived past SeriesA (so far), with 1 unicorn. Looked up your track record on AngelList: Mad respect!)
Plus, I think there's some real problems with the math. Nobody is doing a $5M cap anymore, you have to somehow have really good deal flow to get two good $50k investments a year, $50k is a lot for an angel investing their own money, most companies are going to fail, and as soon as there's another round there's dilution.
1. I made a bunch of money at Unicorn X
2. All my friends from Unicorn X/classmates from Stanford/batchmates from YC are starting new companies
3. I write them a $10k check because I'm their friend
I don't think many of these people see these checks as return-generating but rather as a way to support friends, pay it forward, etc. Money is so easy to get these days, especially at the pre-seed level, that the highest-quality companies are not even running a formal process but instead just hitting up their network.
I very much agree with that. Seed rounds used to be, on average, a lot more formal and rigid in the past. Raising $10k-$100k today is far, far more trivial than it was twenty some years ago. The distribution of angels is far greater, there are simply a lot more of them all over the US than they were in eg the 1990s, everything is a lot more casual at that scale today. It was plain difficult to talk to small investors outside of a professional VC context back then (angel tech investors outside of SV in the 1990s were a bad experience overwhelmingly), the language didn't exist, the angel investors were more often very inexperienced, and the angels didn't tend to know squat about the technology industry or the Internet generally (again, outside of SV). Some combination of increased distribution, more real wealth nationally, tech spread (today it touches nearly everything at all times), and inflation debasing what $10k-$100k means now (you have to increase that by 77% (!) to adjust the 1996 dollar to 2021).
Also, there's a comment a little ways down about access to YC startups, and I think the comment misses your point entirely: it's quite hard to have your money be accepted by a promising startup. I'm not a bigwig/influencer in the YC scene, so gaining access to those cap tables would be pretty tough.
Personally, if I'm ever financially capable of investing in a business to the tune of $25k, I think I would find a lot of satisfaction in enabling the dreams of someone smart and capable that I knew personally.
Obviously, going into business with friends or family is... extremely fraught. But, y'know, optimism.
Clearly, what I'm talking about is not really even in the same ballpark as what the author means. But I guess I'm writing this comment as a way to say to myself "I don't think I necessarily need $3.3M liquid to invest in a business."
And really, angel investing has never struck me as a way to really make money; more of a way to say, as someone with resources, "I believe in this idea, and would like to give it a chance to succeed."
It's also CV padding / bragging rights because you do need to demonstrate a certain amount of wealth. A former colleague dropped $50k on a startup in ~2010, and has been plastering "Angel Investor" all over everything he does. That was his only investment, but it was enough for him to not STFU about it.
Great article otherwise... by the way, minor nitpick here:
> Some angel investors lose 100% of their principle.
Should be "principal", although some might cynically argue that the typo makes this even more true!
For the first point, that's actually quite an embarrassing oversight if I've misunderstood. In the books I read, I understood that the expected return was total, not yearly. So the standard math is that you get 20% of $500k PER YEAR? If so, gotta update the math on this one - the outcomes are radically different than what I report.
Not a bad deal for many people, and you can make proportionately more on this per hour basis if you are able to contribute more capital to begin with.
It seems that most angels won’t have access to the “cream of the crop” as it were, perhaps that’s what’s skewing these numbers? (Worse companies on average would mean lower probability of success on any of them)
The author is correct that the return on average is 20%ish, but that actually takes several years if not decades. Most investors would be better off buying index funds - so you seriously have to enjoy this for it to make sense.
10 companies at 25K for 250K put in and 250K reserve
Data point of one but a friend of mine retired and got into angel investing. I guess he pretty much got out of it after a few years and I got the sense that he'd have done a lot better just in an index fund.
He does still do some angel investing but just for a few companies he feels especially strongly about.
No, if Angel investing didn’t have a commensurate premium, no one would do it. They would just do the easy way. Eventually markets progress to 0 profit (in theory - this has never been observed afaik), but in the mean time people make plenty of return.
The magic of index funds is dead-simple passive avg returns with a solid track record. They promise average returns - which is nothing to scoff at for sure and very appreciated, but they aren’t the end all of investing.
Also: that stellar track record (100+ years) of stellar growth also happens to be over the most economically successful period in the entire history of humanity. So many miracles have happened in the last 100 years that makes our society so different from the previous 10s of thousands of years of human history.
For a 5% annualized avg real return over the next 100 years, we’d need a global stock market of $7.5 quadrillion - 131x the current global market. For 10% we’d need a stock market of ~$785 quadrillion - almost 14,000x the current global market. We’d have to multiply our projected-to-stagnate population by orders of magnitude and pull off many incredible and increasingly insane miracles to pull that off: colonizing the entire solar system, AGI, aliens donating everything to us, and so on - while contending with ever depleting resources.
Relying on the passive growth of the global economy to invest is a “cheat code” quickly closing as it is, much less the best way to get returns.
End rant
It could be the same thing as (day) trading, where many people overestimate their ability to generate a return.
Also the "return" might not be financial, some people might just enjoy paying it forward, having the intellectual stimulation, taking part in a lottery, loads of reasons.
There are just shy of an infinite of investments and investing strategies that have beat the s&p in average returns for decades on avg you can construct with historical backtest data without foresight (ie not just picking the winners given hindsight). There are published papers presenting these.
In your perspective, is getting rich (or even just doing better than the index over any time period) just a matter of time or luck with no room for any skill? Because the index fund beating all other investments would have that conclusion.
Investing in an index fund is easy. Angel investing on the other hand takes a lot of effort. I hope that on average there is some return for it.
A lot of people do things that make little economic sense. (start a vineyard, airline, space company :)
It's not, and I don't see anyone saying that here. It will give better returns than angel investing for the average person (i.e. people not investing in Uber, Stripe, etc.), though.
> No, if Angel investing didn’t have a commensurate premium, no one would do it.
If no one won the lottery, no one would play. That doesn't make playing the lottery a good investment strategy.
The trope of “should’ve just put your money in the index” is an implicit suggestion that index funds are the best place for it, but it should be noted that perhaps index funds are the best place unless you’re willing to undergo the effort to obtain the premium in returns considering the fact that those market beating returns aren’t uniformly distributed.
The lottery analogy doesn’t map here because there are no lottery firms, there are no lottery syndicates, there is no lottery-playing industry on the buy side because you’ve correctly noted there is no repeatable process to generate profits. There is with venture capital and angel investing because there ARE repeatable strategies to generate profits - and many do.
EDIT: That's a weird thing to be downvoted over. Is it not credible for someone making $500-600k gross income to have a $3m+ net worth?
curiously, more angels seem to come from those than from staff engineers who plausibly should have better nose for potential outcomes
With social angel & seed investing, the numbers have really reduced.
My early stage investment portfolio is ~$250K input cost, divided between investments of $1k, $3k, $5k, $10k, $20k, and $50k. Most investments I am trying to shoot for are in the $5k to $20k range. In doing this I have realized that a shotgun approach is better than big check to what I considered the best companies.
Most of the investments are around significant gaps in the market, or products I really believe will displace an incumbent providing an impaired service.
Am way up, mainly from SPACs acquiring companies, but the lockup periods are really really long.
The early stage investments are around 10% of my portfolio, and less than 5% with my wife.
> Most investors would be better off buying index funds - so you seriously have to enjoy this for it to make sense.
I don't believe in primarily buying index funds because I think they:
thrive during bull markets and die off during bears (survivorship bias)
Have outsized risks when serving as a majority of a portfolio
Overly risky due to concentrations
Vulnerable to black swan events
Rewards bad companies by lifting their stocks, regardless of how effective they are
Provide inferior returns compared to value hunting
Limits ability to utilize option strategies
I know these opinions might not be shared by many, and I recognize index funds are generally much better than active funds merely due to mgmt fees, therefore I try to limit my exposure to them to less than 10%, not including my gold hedge.
- Recognized I'm increasingly helping new founders at an advisory level (tech around GPU/graph/cyber/fraud/data, business around b2b/go-to-market/fundraising), and am generally happy to help new founders with 1-2 calls, but limited time...
- Lucky enough to have some personal liquidity, where good to have X% be volatile, and some time to leverage my areas of market insights (e.g., light advisory for VCs/enterprises/...)...
- ... so I started lightly investing in early stage funds I like + offer to help the funds with a bit of dealflow + help the portfolio founders with light advisory. Wider portfolio, better due diligence, and I can provided more targeted help where everyone benefits.
70% die
6% are worth over 100 million
~1% are worth over 1 billion
With that in mind, why not just use your network?
Obviously, you can overcome that by just spending the time, building dealflow, etc, but it suggests that new angels won't get access to the 1% deals. One of my batchmates was Cruise Automation which has had a spectacular trajectory. I don't know for certain, but I suspect Kyle wouldn't have been willing to take $10k from me. :)
And then, yes, if you think of $10k from the other side, as CEO I don't want 100 people in my cap table that I need to signatures from for every corporate action.
I have also gotten into a hot deal or two as a nobody. I write to the ones I am interested as early as possible with what I like about what they're doing, what I think would be helpful advice, and how my experience may be relevant. I also write checks same day.
That said, its a numbers game, just like any form of sales.
There's something special about seeing the future and investing on a team with a dream. It's not the cash flow analysis of growth equity they teach you in school.
This is one unsourced data point, but Axios says "bootstrapped startups typically grow slower and cap out lower than do VC-backed startups" https://www.axios.com/mailchimp-potential-sale-intuit-talks-...