I’ve made these mistakes a couple of times, but you don’t have to
Part of successful angel investing is choosing winners. Another part is avoiding losers. Before we started Homebrew, I made about 20 investments in startups with my own savings. I wasn’t necessarily trying to do something impressive, just taking some venture capital and investing it in people and products that I found convincing. All in all, it worked out well, largely due to some lucky acquisitions from companies like Microsoft, Pinterest, and Facebook, with the latter two growing significantly in pre-IPO share capital prior to their public listing. I’ve never really tracked IRR or net returns, but I’ve paid a lot of attention to lessons learned. Here are 2 (and a half) mistakes I’ve made that you should avoid
Sin of the ego: Never make an investment as an angel believing that you can make the difference between success and failure of a team. A couple of times I met very personable first-time founders who were active in an interesting problem area but did not have a strong product instinct or experience. Should have happened and wish them luck, but an internal dialogue began instead. “Hunter, you are a ‘product guy’, just train them and you have a huge winner in your hand.” The next thing I knew was that hands were being shaken and referrals were being sent. And the investment pretty much went to zero in 12 to 24 months.
As an angel investor, you can certainly be helpful and maybe even reduce the risk of a particular question or problem that the founders face, but you are not on the org chart, do not spend enough people to be the product manager of a product. managed company. Your mileage may vary, but believing that you are the difference between business success and failure is not an investment thesis. Sure, if it is a problem area that is a personal mission to you and you want to spend a disproportionate amount of time helping them figure it out, go ahead, but know that at this point you have an emotional and not an emotional one make financial decision.
Sin of Enthusiasm: Summarized as “Shut up and listen as the founders describe how * they * build the company / solve the problem.” Do you know when you’ve got on really well with someone and it’s just a great jam-sesh? As if you were just finishing each other’s sentences? Feels great, doesn’t it? Well, if it’s related to an angel investment, it might not. Did you walk away excited about what they said or because they agreed with you? Do you have a feel for how they solve problems? How do you want to build this company? Or do you just have an idea of how you would do it? Well it’s not your company. It belongs to you. And before you invest, it is probably better to understand how you are going to build it, as you are going to build it.
In a way, the above two mistakes are sides of the same rationale: don’t invest in people because of your ideas or skills, but invest because you believe they will be able to build something amazing. Then, if your help simply gives them a chance to advance faster with a high probability of success, then you have more than earned your place on the cap table.
Okay, half the mistake now….
Sin of Social Proof (unless it’s your specific strategy): Some people will tell you that the best strategy as an angel investor is to simply find a handful of great investors and get involved in every business they make. If you can actually do this, it seems like a reasonable way to try and get its performance. But if you * don’t * follow this type of playbook, my advice is not to take the presence of “other smart people” around as evidence that it’s a good investment. Especially when it comes to a collection of small checks. And twice as much if you yourself believe it is not a solid opportunity. I’ve certainly had my one or two “uh, I’m not sure about this guy” moments when I was still writing a check about the heat of the deal. You know what, that was an incredibly disappointing experience. And I should have trusted my judgment. So my half advice is if you want to train on social proof go all-in, but otherwise trust your judgment in the end.
Have fun! And make other, more complicated mistakes 🙂