I Made These Mistakes A Few Times But You Don’t Need To
Part of successful angel investing is picking winners. Another part is avoiding picking losers. Before we founded Homebrew I made ~20 or so investments in startups using my own savings. I wasn’t necessarily trying to do anything impressive, just taking some risk capital and putting it towards people and products that struck me as compelling. All in all it worked out fine, driven primary by some fortunate acquisitions to companies like Microsoft, Pinterest and Facebook, the latter two in pre-IPO equity which grew substantially prior to their public listings. I never really tracked IRR or net returns, but I did pay close attention to ‘lessons learned.’ Here’s 2 (and a half) mistakes I made that you should avoid
Sin of Ego: Never make an investment as an angel believing that you can be the difference between a team succeeding and failing. A couple of times I encountered very likable first-time founders who were operating in an interesting problem space but lacked strong product instincts or experience. Should have passed and wished them luck, but instead an internal dialogue started. “Hunter, you’re a ‘product guy,’ just coach them up and you’ll have a huge winner on your hands.” Next thing I knew hands were being shaked and wire transfers sent. And the investment pretty much went to zero within 12–24 months.
As an angel investor you can certainly be helpful, and perhaps even de-risk a specific question or problem the founders face, but you aren’t on the org chart, aren’t spending enough reps to be the product manager of a product-led company. Your mileage may vary, but believing you’re the difference between a company succeeding and failing isn’t an investment thesis. Sure, if it’s a problem area that’s a personal mission for you and you want to spend a disproportionate amount of time trying to help them figure it out, go ahead, but know at that point you’re making an emotional, not financial, decision.
Sin of Enthusiasm: Summarized as “shut up and listen to the founders describe how *they’d* build the company/solve the problem.” You know when you really hit it off with someone and it’s just an amazing jam sesh? Like you’re just finishing each other’s sentences? Feels great right? Well, if it’s in the context of an angel investment it might not be. Did you walk away excited because of what they said or because they agreed with you? Do you have a sense of how they problem-solve? How they want to build this company? Or do you just have a notion of how you’d do it? Well it’s not your company. It’s theirs. And before you invest it’s probably better to understand how they want to build it, since, well you know, they’re going to be building it.
In some ways the above two mistakes are sides of the same core principle: don’t invest in people because of your ideas or your capabilities, invest because you believe they are capable of building something amazing. Then if your help simply gives them the chance to move faster with a high probability of success, you’ll have more than earned your spot on the cap table.
Ok, now that half-mistake….
Sin of Social Proof (unless it’s your specific strategy): Some folks will tell you the best strategy as an angel investor is simply to find a handful of great investors and get into every deal they do. If indeed you can execute this it would seem to be a reasonable way to try and match their performance. But if you’re *not* following this sort of playbook, my advice is to not take the presence of ‘other smart people’ in the round as evidence that it’s a good investment. Especially if it’s collections of small checks. And doubly so if you yourself don’t think it’s a solid opportunity. I certainly had my one or two “eh, I’m not sure about this guy” moments where I still wrote a check because of the heat around the deal. You know what, those were incredibly disappointing experiences. 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 at the end.
Have fun! And make different, more complicated mistakes 🙂