
Things I wish someone had told me before I started angel investing - lisper
http://blog.rongarret.info/2017/07/things-i-wish-someone-had-told-me.html
======
birken
> But the cool kids don't beg. The cool kids — the ones who really know what
> they're doing and have the best chances of succeeding — decide who they
> allow to invest in their companies.

The company I was an early employee of (that ended up being a "unicorn") was
not a cool kid, and we certainly were begging people to invest both at the
angel stage and (especially) the series A stage. And those people got a really
really good return on their money.

This isn't to say there aren't valuable signals perhaps involving "cool kids"
status, but there are a lot of diamonds in the rough.

> I figured it would be more fun to be the beggee than the beggor for a
> change, and I was right about that.

As a much smaller time angel investor myself than the author, I'm still the
beggor. You are only the beggee if you are writing 25k+ checks (and more like
50k-100k to really be the beggee). If you are writing 5k or 10k checks, you
are going to be begging people to take your money, cool kids or not cool kids.
So if you are looking to get into angel investing today without allocating
6-figure amounts to your hobby, I wouldn't advise doing it for ego reasons :)

~~~
empath75
How is it that a $10k check even gets a startup to take your call? That pays
like one engineer for a month, if that. (Genuinely curious)

~~~
mojuba
Considering that "cool kid" founders do engineering themselves and that they
typically don't pay salary to themselves, 10k could cover their initial
hosting or say hardware prototyping costs.

~~~
soup10
"Cool kids" should not be taking 10k checks except as a favor, every investor
they take on and have to maintain a relationship with is a potential
distraction to the business. I'm lucky to have more than enough capital to run
my business until we're done prototyping and ready to start growing.

------
mindcrime
_There is a small cadre of people who actually have what it takes to
successfully build an NBT, and experienced investors are pretty good at
recognizing them._

I really do question this. The "problem of induction"[1] comes into play when
you start talking about pattern matching and learning from "experience". That
is, there's no guarantee that the future will look like the past.

Before Zuckerberg was Zuckerberg, I wonder how many people would have said
"Hey, I recognize in this kid the innate capacity to be an NBT"? Of course
they got funded, but I believe most of it was after they already had
demonstrable traction.

On that note, one of the things that makes fund-raising such a drag, is that
so many angels (at least in this area) want to see "traction" before
investing. Even though, typically, you would thing that angels are investing
at such an early stage that nobody would really have traction yet. Maybe it's
just that the angels here on the East Coast are more risk averse.

[1]: [https://plato.stanford.edu/entries/induction-
problem/](https://plato.stanford.edu/entries/induction-problem/)

~~~
ScottBurson
I recall seeing a comment by Paul Graham somewhere to the effect that
Zuckerberg set off his "founder detector" very strongly. This was after
Zuckerberg was successful, admittedly, but it at least gives some suggestion
that someone skilled at recognizing founders would have seen his potential.

~~~
dharmon
It wasn't a comment on HN, but during an interview (video) he did with MZ on
YC. I don't have a link, but that may help.

Zuckerburg was telling a story of how he built a "social" website to share
notes for an art history class, except he didn't have any notes himself but
got everyone to share theirs so he could pass his exam. This supposedly was an
early experience that started him thinking about social websites and sharing
online.

PG then commented how his internal alarm was going off saying "fund him. Fund
him", and how even though it was too late he can't shut off his brains
instinct to sniff out good founders.

~~~
lazyjones
> _Zuckerburg was telling a story[...]PG then commented how his internal alarm
> was going off saying "fund him._

Is this a story about PG's amazing "founder detector" or perhaps one about the
learnable skill of telling a good story to potential investors?

~~~
srtjstjsj
It's a story of how PG loves people who are "naughty" and know how to combine
technical chops with an "screw over everyone around me to get ahead" attitude.
AirBnB is the quintessential YC story.

------
TheBlerch
The author makes good points here. While it's true that YC and other venture
investors invest in many companies to increase the chances of large returns on
the best of their portfolio companies, there is another significant advantage
to YC having a bunch of companies in each batch - the teams that are not doing
so well are a source of talent for the teams that are doing well. At some
point YC can and has encouraged teams they think aren't making enough progress
to join teams that are. A friend in one batch described his batch consisting
of: 1/3 working on great ideas/products that could be big, 1/3 working on
mediocre ideas/products and 1/3 working on bad ideas/products, and those in
the bottom 1/3-2/3 still had good team members that could be sourced for
talent for the best 1/3 and for previous YC companies doing well.

~~~
dkarapetyan
The YC network effect is the secret sauce. Most YC companies would not even be
able to bootstrap if it wasn't for YC alums like AirBnB.

~~~
tstyle
Definitely. For an organization that spent a decade teaching startup the
importance of building moats, it's no surprise that they've built their own.

~~~
thecrazyone
If they hadn't built such a moat it would surely be irony but wouldn't have
unusual to do what they preach

------
justinsb
Ron was one of our investors in FathomDB, and that turned out to be a bad
financial investment, much to my personal dismay & regret.

However, something that I think the essay modestly overlooks is the non-
financial elements. The investors made a huge difference in my life & that of
the others that worked for FathomDB. I like to think that we moved the
industry forward a little bit in terms of thinking about modular services (vs
a monolithic platform-as-a-service) although it turned out that the spoils
went mostly to the cloud vendors. Many of the ideas developed live on in open-
source today.

Of course, this all serves Ron's point in that it doesn't make for a good
investment. But that doesn't mean that no good came of it - and it makes me
want to work harder next time so that it is both a good outcome and a good
investment.

So: thank you to Ron and all our investors. It is no accident that you are
called angels.

------
jonnathanson
Every single word in this article burns clear and bright and true. Every word.
Every paragraph. Every penny paid for every hard lesson learned.

If you want to get into the angel game in 2017, and you want to do it to make
money, then I'd sincerely advise you to go take out $5-10k for a weekend in
Vegas, and try to get really good at a game of complete chance, like roulette.

"Good" at roulette, you're thinking? What can that possibly mean?

It means having a large bankroll and knowing your tolerance for burning
through it. It means understanding how to pace yourself, so that you're not
blowing through your bankroll in the span of a few minutes. It means getting
the itch out of your system, if, indeed, this is merely an itch.

Can't afford to fly to Vegas and blow 10 grand in a weekend? Don't get into
angel investing. You can't afford it. I say this not as a snobby rich asshole,
but rather, as the sort of nouveau-riche asshole who lost quite a bit of money
many years back, doing exactly what the author did, and losing money I learned
in retrospect I didn't really want to lose.

I still make the occasional investment, but as part of a group. By and large,
those investments go to founders we've worked with before, or who come highly
regarded. We invest super early, we eat a fuckton of risk, and we expect to
lose 99.999% of the time. We're too small-time to play the game any other way
at the moment.

Angel investing is about bankroll and access, and if you're wondering whether
you've got the right access, you don't. So you're left with bankroll. Have
fun, and try to get lucky if you can help it. :)

~~~
crispytx
Yeah angel investing seems to be a wealthy mans game. You probably need to
make at least 10 bets to have a chance at earning your money back. I did a
little research and it looks like the first YC batch was comprised of 9
companies. Two of those companies, Reddit and Loopt, likely generated all the
returns for that batch.

~~~
csense
PG agrees you, he wrote a whole essay about the subject in 2012 [1]. At that
point in time, he wrote that "just two companies, Dropbox and Airbnb, account
for about three quarters of [YC's value]."

[1] [http://www.paulgraham.com/swan.html](http://www.paulgraham.com/swan.html)

------
seibelj
My 2 cents - As an investor or potential employee when analyzing a startup,
pay close attention to how scrappy and capital efficient they are. Do they
have excessively nice office space? Are the founders making too much in
salary? Does it seem like the executives are working like animals, or do they
have the big company mindset where they take it easy? Startups are nothing
like established, revenue-generating companies and the mindset should be
entirely different.

The #1 thing a startup can do to survive is to be as stingy as possible with
their capital.

~~~
throwaway2048
When you see startups blow millions a year on AWS spend because its "easy",
when you could do the same on dedicated hardware for 1/10th or even 1/100th
the price, it always shocks me.

Yes, queue the comments about "Total cost of ownership", past the point where
you cant afford an OPs person(s) (which you will eventually need for AWS
anyways) AWS is a money-sucking black hole.

~~~
eropple
It's not about the hardware. It's about what happens when it breaks--which it
will--and when you need stuff you can't reliably build off the top of your
head--which you will.

The axe you're grinding is profoundly weird, and indeed a large part of my
business is because the stuff we build is _extremely_ cost-competitive with
dedicated hardware. Difference being that I can open up the console and start
shooting servers and nothing breaks. You're not saying the same with the
_overwhelming_ majority of naive "dedicated hardware" deploys, especially at
the levels of skill and expenditure that small companies can employ.

~~~
_jal
I don't see anything "profoundly weird" about it (a bit _specific_ , maybe,
given the rest of the conversation).

You're right, of course, about naive deployments. But it just isn't that hard
to build reliable systems, assuming some experience. And if you're doing
anything more interesting than pretty CRUD forms (say, atypical storage or
bandwidth requirements), DYI becomes _much_ cheaper, fast.

To reiterate, yes, you need someone who knows what they're doing on the
systems end. But you will anyway at some point, and making that hire earlier
can pay for itself.

------
brianwawok
I was hoping for a fact like

"And this is how I made 42 investments in my first 3 years. All are now bust,
and I am out 1.4 million dollars"

Obviously not fun to tell the world how much money you lost, but it would help
to add color to the people behind the VCs, that developers love to see as the
frenemy (terrible people out to screw you, but man their money is nice
sometimes).

~~~
lisper
Looking at what other people did and how that turned out is completely useless
because the things that matter are the day-to-day details which you can only
get by immersing yourself in the process full-time for a long time. So sharing
that data would be worse than useless. At best it would serve to satisfy some
prurient interests, and at worst it would cause someone to act on what cannot
be anything other than hopelessly incomplete data.

But there is one detail I will share with you: I decided to start not in high
tech because I thought it was too risky, but to get my feet wet by starting
with less risky investments. So I decided to invest in a real estate
development in 2006, thinking that even in a worst case scenario there's an
asset there that will be worth _something_ no matter how badly things go
wrong.

Like I said in the OP, you will be _shocked_ at how things can fail. (And this
is far from my only horror story.)

FWIW, I've also had some winners along the way. I'm not poor, just poorER than
I would have been if I'd just put the money in VTI.

~~~
stevenj
Are most angel investors focused on finding the 1000x companies (i.e. the NBT)
that VCs are?

I guess my question is what's a practical, good outcome for an angel investor
when a company exits? Or what rate of return do the most successful angel
investors have?

~~~
lisper
I was in denial about this for a long time, but the fact of the matter is that
your overall outcome is almost entirely determined by your outliers. If you
take all of the investments I've ever made, including going to work as an
early hire at Google, the I've won. If I leave out Google, then I've lost. If
I leave out my single biggest loss, then I've won again. If I leave out my
next biggest win, then I've broken even.

~~~
srtjstjsj
Did "not spending 1 more year as an employee at Google" cost you more or less
than all of your later wins?

~~~
lisper
More. And by a huge margin. Leaving Google early was by far the most costly
financial decision I've ever made in my life. But I don't regret it. You have
to focus on the money you made and not the money you didn't make or you'll be
miserable no matter what happens because no matter how well you do you could
have always done better in hindsight.

------
Theodores
I prefer the phrase philanthropy to angel investing. As I understand it
philanthropy is using your own hard earned money for lost causes of one's own
choosing. This is different to fundraising or giving money to charity. With a
modest philanthropy budget you can change lives and be able to support others
achieve their dreams. Everything can be on an individual basis with no formal
framework. For instance, what happens if you pay someone's way so they can
finish their degree? What is the potential return? Or, more radically, what
happens if you find a homeless person a place to live? Do they get a job and
return to society? These things can be found out with radical personal
philanthropy. I would say there is good value in this if you do want to learn
about society and the human condition. I also think that financial and time
losses are an investment. This type of work where you really do invest in
individuals should help anyone angel investing to have the chops to do it
well.

~~~
srtjstjsj
Yes, a failed business is called a hobby.

------
Nelson69
So fundamentally as an angel you're in early. That usually means that you face
dilution. I also wouldn't think it would be that unusual for the business to
make a pretty dramatic pivot or two and that initial angel investment may have
been for something else entirely by the time the company finds its legs. There
are basically 3 things you can do in that dilution situation: 1) Do nothing
and go from basically owning the business to not. (You still get to watch and
be part of the ride) 2) Pony up more money to match the big investors,
assuming the terms allow it, or 3) Fight it or any change every step of the
way.

A VC once told me that there were "good angels and bad angels" Too many bad
ones and he wouldn't invest. A couple specific bad ones and he wouldn't
invest. To that, there are also good angels that will make introductions,
spend time coaching, and really help beyond what I'd call a "hobby." It seems
like there are good people out there with money and knowledge and they really
want to help out others in an angelic sort of way knowing full well they will
likely lose their investment.

~~~
mysterypie
> _As an angel you 're in early. That usually means that you face dilution._

I've always wondered why early investors don't include an anti-dilution clause
in the contract? It could be structured in many ways, but it could be simple
as "my share of the company will always be 18% (or whatever), no matter what,
until I sell". Then when the company takes on more investment, it'll be up to
the new investors and the company's accountants to do whatever share
adjustments to keep you at 18%.

There must be some really good reason(s) why this isn't done and I hoping
someone can explain.

~~~
sjbase
Makes it much harder to raise future financing, which is bad for everyone.

A company who has given away equity with anti-dilution is much less attractive
for a new investor. If 30% of the company is allocated on anti-dilution, that
means everyone else without anti-dilution is fighting for the remaining 70%.
ALL future dilution comes out of their share. It acts like a dilutive
multiplier.

So any new investor is going to want anti-dilution also. But there's only ever
100 percent. So you end up with new investors trying to force old investors to
sell (or tasking the founders/board with doing so). This is not uncommon in
reality.

BTW, most anti-dilution works by allowing existing investors the option to put
in more money with each new round. I.e. they can "top off" their equity to X%,
but only by investing more. So as an angel, you might have invested $100k for
a few points, but to stay topped off in future rounds, you start having to
invest a lot more as the valuation goes up. Not everyone has the desire or
liquidity to do that.

------
danieltillett
While the points Ron raises are really good, there is another source of
investing error which is "generals fighting the last war" effect. As an Angel
investor you are drawn towards founders and companies that resemble you and
your experiences. This is almost certainly going to lead you astray as
conditions will have changed and everyone's experiences are so limited.

~~~
lisper
I was actually thinking of mentioning this, but there is a very strong
counter-example: Google. One of the reasons Google went unnoticed for as long
as it did (both Excite and Yahoo passed on opportunities to buy it for <1M)
was that everyone thought that the search engine market was mature.

In fact, I think this is one of the reasons so many people are trying to re-
invent Facebook. If Google could re-invent Excite and Facebook could re-invent
MySpace (and Reddit could re-invent Digg) then why can't someone re-invent
Facebook? And maybe someone can. (I sure hope so!)

~~~
danieltillett
Actually the "fighting the last war” effect was the reason everyone passed on
Google. Almost all the VCs (and other companies) thought the search war and
been fought and won five years before. Rather than looking at Google from an
unbiased viewpoint (that Google was the first to solve search), they saw it as
the 17th competitor in a mature market.

I think the difference with Facebook is the network effect and that it is run
by Zuckerberg. What ever failings Mark has a CEO he has one amazing strength
which is a single minded focus to let no competitor to Facebook rise. As he
has shown time and time again he will buy you out or outspend if you have any
possibility of being a competitor.

~~~
lisper
> Actually the "fighting the last war” effect was the reason everyone passed
> on Google.

Yes, that was exactly the point I was trying to make: Google is a counter-
example to the theory that you should not fight the last war. (On the other
hand, it is also a positive example, because no one has been able to displace
Google despite there being no shortage of attempts.)

------
polote
Summary: beginners almost never invest well.

And it is the same for stocks, many people think they will make money by
investing in a specific company because their logic says it is good idea.

Investment is a job, and to win you need experience

~~~
jacques_chester
> _Summary: beginners almost never invest well._

Investing in startups is closer to betting on horse races than stuff like the
S&P 500 or buying bonds.

There're a lot of people who will sell you systems. There's a lot of form
guides. In a booming economy more people take a flutter on the fillies. And
every once a while a thoroughbred emerges that is simply unstoppable.

But in general, only the bookies win.

The main difference is that in horse racing you can bet on a single horse and
in the course of a few races, you'll probably bet correctly and make a little
scratch.

In startups you can only bet the trifecta: you'll probably never hit it in
your entire life, but the payoff is much higher if you do.

------
trevyn
> _There are a myriad ways to make a company fail, but only two ways to make
> one succeed. One of those is to make a product that fills a heretofore unmet
> market need, and to do it better, faster, and cheaper than the competition.
> That is incredibly hard to do. (I 'll leave figuring out the second one as
> an exercise.)_

Is he implying some sort of unethical behavior as the second way?

~~~
lisper
Yes.

[UPDATE: before you downvote this answer you should know that I am the OP.]

~~~
trevyn
Something specific, or just unethical behavior in general?

~~~
lisper
Not "in general", but there is a long list of unethical behaviors that, sadly,
can contribute to success. Selling snake oil. Abusing monopolies. Flat-out
lying.

However, it's not good to go to the other extreme. I've seen companies fail
because the CEO bent over too far backwards to be ethical and as a result let
people walk all over him. One of the qualities that seems to be required in a
successful founder is a willingness to be an asshole when circumstances demand
it (and being able to tell what those circumstances are!)

~~~
gizmo
It's not _required_ to be unethical, it's just really tempting when you see
others get rewarded for their unethical behavior. "When circumstances demand
it" is of course the excuse of all unethical people throughout history. Total
weak sauce.

~~~
nickpsecurity
Try being the only one without a pile of patents on important tech in a patent
war. Offensive use of patents + piles of money from market share and their own
lock-in are among the reasons newer, big players are holding off older ones in
the patent suits designed to eliminate competition with older ones.
Originally, I thought I could just avoid what was patented until I learned how
vague and ridiculous they are. Plus, there's said to be 200,000+ patents that
could cover smartphones alone. Where would I start if doing legal, due
diligence? Then, maybe I'd license them for a fair amount. I found NDA'd
offers, high-balling, and even I.P. holders suing people w/ Oracle demanding
$25 per Android phone for its tiny slice of smartphone patents, Java, or
whatever. So much more honest licensing.

So, status quo for tech companies is to not read on patents (avoid knowing
infringement), grow as fast as they can no matter what patent laws they
violate, accumulate their own patents where possible for use in self-defense,
and build up lawyer money. One day, when the attacks come, the company will be
ready for a solid defense where it claims it didn't know about the patents,
they're void, or they're overpriced. This might also be leverage for a better
deal during an acquisition.

The operating environment is unethical in its very nature with certain things
such as patents, trademarks, copyright, lock-in w/ formats/protocols (eg
walled gardens) and so on. So, those that can use them will get a financial
advantage. Those that don't might get so much less of the market they get
squashed or denied a fortune they could be doing a lot of good with. Lots of
grey areas to think through in these sorts of things.

~~~
greglindahl
You have an unusual set of ethics there. What you're describing for patents is
not violating patent _law_ , and I doubt you'd find many people in the tech
industry who would equate potentially infringing someone's patent to adopting
source code you don't own into your product in a copyright-infringing way.

~~~
nickpsecurity
" What you're describing for patents is not violating patent law"

The law says I can't reproduce what's in a patent without permission/license
from the patent-holder. The law also says that your intent doesn't matter:
unknowingly infringing is also a violation but with less penalties. The big
players defining markets or entering mature ones file patents on as much of
them as possible to maximize chance new competition will infringe on one of
their claims. They also acquire companies for their patents. So, newcomers
often have to violate patent law or pay some large amount to a bunch of
companies just to get their product in the market if keeping it legal.

Or they just build, grab market share, and pretend patents don't exist. That's
how almost all of them make it. The alternative is endlessly Googling patent
databases about almost everything your business is doing in tech. I say good
luck to a startup or SME trying to do that.

"You have an unusual set of ethics there."

The above advice was given to me by people who create patents for big
companies. They said it's what their employers do. It's not my ethics so much
as the only option that works without putting one player in a defensive, weak
situation. That player still might get hit by NPE's, though. Whatever isn't
deterred will involve a big payout to patent-holder or a bigger payout to
lawyers that, if defense fails, results in an even bigger payout to patent
holder.

"I doubt you'd find many people in the tech industry who would equate
potentially infringing someone's patent to adopting source code you don't own
into your product in a copyright-infringing way."

In their minds, that might be true. It wouldn't surprise me given that patent
provisions aren't in a number of FOSS licenses. In legal reality, they're both
a monopoly on a something that require a license to legally use. Thanks to
bribery of politicians, the game is also rigged in favor of patent-holders and
big incumbents most of the time.

~~~
greglindahl
You're explaining patents to someone who has a bunch of them! "Breaking the
law" or "violating the law" is generally used to indicate a criminal case;
patent lawsuits are not criminal cases.

By the way, my patent lawyers (both in startups and at a big tech company I
worked at) tell me that patent cases are crapshoots and there's no good way to
predict what's going to happen in them. This also means that I really don't
have any idea if I'm actually infringing someone's patent, even if I knew
about it. Which I don't, because that advice to never read anyone else's
patents is good advice for any inventor.

------
rwmj
I wonder how often VCs/angels are conned out of money (and I don't mean by
delusional entrepreneurs, but by genuine con-artists). I assume it must
happen, and with all the money sloshing around may be common.

~~~
slackingoff2017
I would say it's extremely common. Fake it till you make it is almost
expected. Even the cons don't think they're lying.

I'm of the opinion that a lot of VC's are like money managers. Index funds
regularly beat their returns but that doesn't stop them from think they're
God's Gift.

VC's seem to be much the same. There's a lot of "black magic" to the funding
process. In my experience, something that can't be logically understood
usually has no logic behind it. Some of the VC's probably have real metrics
but it becomes statistically impossible to find success using logic when you
only fund a handful of companies a year. There's not enough data.

------
geetfun
Being a good investor takes a certain kind of temperament. Can't really teach
this. For most, as Buffet says, stick with the index fund.

------
PangurBan
Thank you to the author for sharing your experience and insights. Some tips
for being a better angel investor and reducing risk: 1) I can't stress this
enough - learn the ABC's of private investments. I have seen a ridiculous
number of angel investors as well as founders who don't understand the
fundamentals of private equity investments and returns - even people who have
been working at a startup for several years. 2) Limiting yourself to meeting
with and investing in startups an industry in which you've worked, so that you
understand their industry, better evaluate them and add value 3) Limiting
yourself to meeting with and investing in startups in industries in which you
or close colleagues and friends have worked so that you can consult with them
regarding the potential investments 4) Joining an angel group, such as Band of
Angels, so that you have a group of fellow angels to learn from and discuss
investments with 5) Meeting with successful serial entrepreneurs who make
angel investments to ask what they look for 6) If you have not founded a
company or worked at an early stage startup, learn Lean Startup methodologies
7) Make sure you understand how a startup achieves product-market fit 8) Put
together a list of good people and companies who can help startups you invest
in, with everything from operations to tech to growth There's much more, but
this is a start.

------
apeace
> There are a myriad ways to make a company fail, but only two ways to make
> one succeed. One of those is to make a product that fills a heretofore unmet
> market need, and to do it better, faster, and cheaper than the competition.
> That is incredibly hard to do. (I'll leave figuring out the second one as an
> exercise.)

Any guesses on the second way?

The best I could think of was: find dumb investors to pump it full of money
and hype it. Then rely on all the hype to get it sold.

I'm hoping for a less cynical answer!

------
untangle
Cap table economics are an equally-important reason to fear angel investing.
Unless the company is very successful, angels tend to get diluted-out of the
money by VC rounds. In the baseball vernacular, angel investors must pick
triples and homeruns to make money. Singles and outs will result in total
loss. Doubles may break even. It's a tough way to get ahead. Impossible
without some insider edge (YC, pundits, stars, etc.).

------
dabei
Seems to me acting as a lone Angel investor is not very efficient and quite
limiting to the kinds of opportunities that are open to you. It's analogous to
the constraints you face with as a lone founder of a startup. Maybe better to
team up and benefit from each other's insight and capital. And totally agree
you have to do this seriously as a job unless you don't care about the money.

------
david927
> _There is a small cadre of people who actually have what it takes to
> successfully build an NBT, and experienced investors are pretty good at
> recognizing them. Because of this, they don 't have trouble raising money._

That's a pretty specious statement. I don't know how he came up with that; it
certainly doesn't match with a lot of reality.

~~~
lisper
> I don't know how he came up with that

By looking at history. If you look lists of the most valuable startups the
vast majority of them didn't have any trouble raising money. In fact, I can
only think of a single recent (last 10 years) counterexample.

~~~
burrows
Alternatively, this just shows that it's hard to build the NBT without
funding.

~~~
lisper
The causality definitely runs both ways. If a company is _perceived_ as an
NBT, and that results in investors piling on, then the company is that much
more likely to actually become an NBT. That's one of the reasons investors
like to pile on: just because a prophecy is self-fulfilling doesn't make it
any less accurate (just the opposite in fact).

~~~
burrows
What lesson should this teach founders; don't discount the importance of
`looking like` the NBT?

~~~
david927
Or it could show how most investors are still very unsophisticated and
insecure. They don't want it to be the NBT, they _need_ for it to be. If the
music industry was this bad, you would mainly be hearing variations of Taylor
Swift and Justin Bieber on the radio.

The lesson for founders, therefore, should be to avoid investors for as long
as possible.

------
caro_douglos
This post reminds me of "the war of art" where you're encourage to make the
decision right off the bat of whether or not you're a professional or an
amateur.

I'm somewhat biased when it comes to angels because most of the experiences I
heard ([http://etl.stanford.edu/](http://etl.stanford.edu/)) were almost
always homeruns. Sure there's the down in the gutter claims every investor
tries to sob about where they lose money but let's be honest wouldn't it be
great if someone gave a talk and said how much they lost (and how much they're
continuing to lose) by attempting to get rich quick.

So far bootstrapping appears to best way of weeding out the shitty angels who
haven't been in the game for a minute.....it's a pleasure to not deal with
someone wanting to give you a check while telling you what their expectations
are for YOUR business not their 10k+ check.

------
max_
>One of those is to make a product that fills a heretofore unmet market need,
and to do it better, faster, and cheaper than the competition. That is
incredibly hard to do. (I'll leave figuring out the second one as an
exercise.)

Anyone figured this out?

------
kushankpoddar
I am realising that a weekly exercise on 'inversion' should be a must-do for
founders/investors.

Inversion essentially means think hard about: "What factors can cause my
venture to fail?, How to avoid those factors?"

This sounds simple but it could be a very powerful idea.
[https://www.farnamstreetblog.com/2013/10/inversion/](https://www.farnamstreetblog.com/2013/10/inversion/)

------
Radim
Off-topic, but _lisper_ , congrats on your neat HN karma points!

    
    
      It's 222-2222
      I gotta answering machine that can talk to you

------
stevenj
Interesting read.

I'd love to hear from other angel investors with (perhaps) different
experiences and opinions.

~~~
rficcaglia
my experience is that good deals are only available/viable/mutually beneficial
when you have direct personal, close connections (please stop sending LinkedIn
messages!) to the team. "retail" investing doesn't succeed in this arena.

my opinion is that you should only invest as a lone/lead angel in what you
know from your long history in a super niche space where you know all the
important cognoscenti from a career full of personal interactions...anything
else is a guaranteed loss. fine if you use it as the OP says to learn about a
market. though would be better IMO to just volunteer to work at a startup in a
new area and learn by doing...which I have done and found highly educational
and ultimately rewarding.

------
kumarvvr
The author has mentioned "random shit that markets do, like completely ignore
clearly superior products..."

Can anyone give me such examples?? I am curious.

~~~
c1utch1
Most obvious example is when an enterprise software / hardware startup will
have superior product than bigco in their space. However, bigco sales &
marketing budget and status quo stop the startup from gaining enough traction
for success.

------
sgroppino
Perhaps the key is to invest in what you know?

~~~
ted_dunning
Not if you want to get in on the NEXT new thing. By definition, you don't know
that.

------
graycat
Good news: I can agree with some of the OP.

Much better news: I do believe that it's fairly obvious that there are good
solutions to the most important problem mentioned in the OP.

First a remark on scope: I'm talking about information technology (IT)
startups based heavily on Moore's law, the Internet, other related hardware,
available infrastructure software, etc., and I'm not talking about bio-medical
technology which I suspect is quite different.

Second, a remark on methodology: When the OP says "almost certainly" and
similar statements about probability, sure, (A) in practice he might be quite
correct but (B), still the statement is nearly always just irrelevant.

Why irrelevant? Because what matters is not the probability, say, estimated
across all or nearly all the population, or all of business, or all of
startups, or even all of IT startups. Instead, what is important, really
crucial, really close to sufficient for accurate investment decision making,
is the conditional probability given what else we know. When the probability
is quite low, still the conditional probability -- of success or failure --
given suitable additional events, can be quite high, thus, giving accurate
decision making. So, net, what's key is not the probability but what else is
known so that the conditional probability of the event we are trying to
evaluate, project success or failure, given what else we know is quite high.

So, back to the OP. We can start with the statement:

> The absolute minimum to play the game even once is about $5-10k, and if
> that's all you have then you will almost certainly lose it.

Here for the "almost certainly" to be true needs to depend on what else is
known. Sure, if not much more is known, then "almost certainly lose it" is
correct. But with enough more known, the first investment can still likely be
a big success.

The big, huge point, first investment or 101, is what else is known.

> There is a small cadre of people who actually have what it takes to
> successfully build an NBT, and experienced investors are pretty good at
> recognizing them.

I agree with the first but not with the second. From all I can see, there is
hardly a single IT investor in the US who knows more than even dip squat about
how to evaluate an IT investment. E.g., commonly the investors were history or
economics majors and got MBA degrees. Since I've been a prof in an MBA
program, I have to conclude that a history or economics major with an MBA has
no start at all evaluating IT projects.

Here is huge point:

We can outline a simple recipe in just three steps for success as an IT
startup:

(1) Find a problem where the first good or a much better solution will be
enough nearly to guarantee a great business, e.g., the next big thing.

(2) For the first good or much better solution, exploit IT. Also exploit
original research in high quality, at least partly original, pure/applied
mathematics. Why math? Because the IT solution will be manipulating data; all
data manipulations are necessarily mathematically something; for more powerful
manipulations for more valuable results, by far the best approach is to
proceed mathematically, right, typically with original work based on some
advanced pure/applied math prerequisites.

(3) Write the corresponding software, get publicity, go live, get
users/customers, get revenue, and grow the revenue to a significant business.

So, right: Step (2) is a bottleneck: The fraction of IT entrepreneurs who can
do the math research is tiny. The fraction of startup investors who could do
an evaluation of that research or even competently direct such an evaluation
is so small as to be essentially zero.

So, net, the investors in IT are condemned to miss the power of step (2) and,
thus, flounder around in nearly hopeless mud wrestling in a swamp of
disasters. And, net, that's much of why angel investors lose money.

So, the main problem in the OP was losing money on IT projects. The main
solution, as both an investor and an entrepreneur, is to proceed as in steps
(1)-(3).

For IT venture capitalists (VCs), they can't use step (2) either, e.g., can't
do such work, can't evaluate such work, and can't even competently direct
evaluations of such work, but they have a partial solution: Likely enforced by
their LPs, in evaluating projects they concentrate on cases of _traction_ and
want it to be significantly high and growing rapidly.

So, with this traction criterion, and some additional judgment and luck, some
of the VCs get good return on investment (RoI), but they are condemned to miss
out on step (2).

So, what is the power of step (2)? As we will see right away, clearly it's
fantastic: Clearly with step (2) we can do world changing projects relatively
quickly with relatively low risk.

The easiest examples to see of the power of step (2) are from the US DoD for
US national security. Some of the best examples are the Manhattan Project, the
SR-71, GPS, the M1A1 tank, and laser guided rockets and bombs, all relatively
low risk projects with world changing results. Each of these projects, and
many more, was heavily dependent on step (2) and met a military version of
steps (1) and (3).

More generally, lots of people and parts of our society are quite good at
evaluating work such as in step (2) and proposals for such work, just on
paper. We can commonly find such people as professors in our best research
universities and editors of leading journals of original research in the more
mathematical fields.

I started some risky projects, e.g., an applied math Ph.D. from one of the
world's best research universities. From some good history, only about one in
15 entering students successfully completes such a program. The completion
rate of applied math Ph.D. programs makes the Navy Seals and the Army Rangers
look like fuzzy, bunny play time. With much of my Ph.D. program at risk, I
took on a research project. Two weeks later I had a good solution, with some
surprising results, quite publishable. Later I did publish in a good journal.
I could have used that for my Ph.D. research, but I had another project I'd
pursued independently in my first summer -- did the original research then, in
six weeks. The rest of that work was routine and my dissertation. While
working part time, the Navy wanted an evaluation of the survivability of the
US SSBN fleet under a special scenario of global nuclear war limited to sea,
all in two weeks. I did the original applied math and computing, passed a
severe technical review, and was done in the two weeks. Later I took on a
project to improve on some of our work in AI for detection of problems never
seen before in server farms and networks. In two days I had the main ideas,
and a few weeks later I had prototype software, nice results on both real and
simulated data, and a paper that was publishable -- and was published. My work
made the AI work look silly; it was. Once in a software house, we were in a
competitive bidding situation. I looked at what the engineers wanted and saw
some flaws. Mostly on my own, I took out a week, got good on the J. Tukey work
in power spectral estimation, wrote some software, and showed the engineers
how to measure power spectra and how to generate stochastic process sample
paths with that power spectrum. As a result, my company won sole source on the
contract. So, before I did these projects, they all were risky, but I
completed all of them without difficulty.

Lesson: Under some circumstances, it's possible to complete such risky
projects, given the circumstances, with low risk.

But IT VCs can't evaluate the risk before the projects are attacked or even
evaluate the results after the projects are successfully done. So IT VCs fall
back on traction.

I confess: It appears that the IT VCs are not missing out on a lot of really
successful projects. Well, there aren't many IT startups following steps
(1)-(3).

So, for IT success, just borrow from what the US military has done with steps
(1)-(3).

The problem and the opportunity is that nearly no IT entrepreneurs and nearly
no IT investors are able to work effectively with steps (1)-(3), especially
with step (2).

The IT VCs have another problem: The know that for the next big thing --
Microsoft, Apple, Cisco, Google, Facebook -- they are looking for something
exceptional. And they know that those for examples have very little
significant in common. Still the IT VCs look for patterns for hot topics at
the present or recent past. That's no way to find the desired exceptional
projects. E.g., when the US DoD wanted the Manhattan Project, they didn't go
to the best bomb designers of the previous 20 years; doing so would not have
resulted in the two atomic bombs that ended WWII. Instead, the US DoD listened
to Einstein, Szilard, Wigner, Fermi, Teller, etc., none of whom had any
experience in bomb design.

~~~
lisper
> We can outline a simple recipe in just three steps for success as an IT
> startup:

You might as well put a sticker on your forehead that says, "SUCKER."

Four of my investments (including a startup of my own) were absolute slam-
dunks according to your process: large, well-established markets, orders of
magnitude price-performance improvement over the competition, good IP
protection. They all failed.

Like I said: unless you are very, very lucky, you will be absolutely be
shocked by the creative ways the universe will come up with to screw you.

~~~
graycat
Fill us in; why did they fail?

I've seen a lot in business, and I never saw anything as challenging and
perverse as your "creative ways the universe will come up with to screw you".

The worst I heard of was law suits by patent trolls.

For "secret sauce" in IT, that's in software locked up in the internals in a
secure server farm. Tough to know just what is in that. Tough to get a judge
to force you to present all your software to some troll without a lot of good
reason.

There can be collusion in restraint of trade, but that's much harder to do now
than 100 years ago.

There can be nuisance law suits, but the usual response is that those are too
much work and trouble if the defendant is small and too little chance of
winning if the defendant is big enough to defend themselves.

I saw a lot of how FedEx grew; some Teamsters were angry, but all they wanted
was the usual, just money. Your statement of the perverse universe was not the
case at FedEx.

I've seen some families do well with life style businesses. They commonly had
problems, e.g., union problems, but they didn't have anything line your
perverse universe claims.

Somehow I doubt that IT startups will have union problems anything like what
was common in some old US businesses and industries some decades ago.

~~~
ted_dunning
1) key employee has an old discounted investment make them independent and
they take flight (didn't see that coming.. they seemed all in)

2) dot-com bubble and crash. Simultaneously freezes investment and convinces
everyone that internet related startups are hokum. We survived and exited at
less than a quarter what we would have had. It didn't matter that we had
positive cash flow and gazillions of thrilled customers.

3) major media company quietly puts copyrighted material onto your system,
sues you for copyright infringement based on that same material and spends
years in discovery. You win, but lose.

4) the very clever marketing guy your investees just hired turns out to be a
plant by the giant competitor who leaks your marketing plans like a sieve back
to self-same giant competitor.

There are gazillions of other things the universe can do to you.

~~~
graycat
1) Yup, employees can leave. We know that. If have a "key" employee, then need
some strong reasons they will stay, and even with those reasons they may leave
because of something about their marriage, children, health, etc. If you
promised them stock and are 18 months late, then they may get pissed, not
trust you, and leave. They may get run over by a truck, etc.

We know that.

That's why the founder should be the main key employee. Or, if have a key
employee, then maybe they should have a _deputy_ that can fill in in case of
an emergency. That's why there are carefully thought out compensation plans
for key employees, e.g., unvested stock options.

Once I was in a little company. Since there was some question about my status,
I circulated some resume copies. In that little company, some instances of
good work I'd recently done made me essential to our business with one
potentially good customer and with our main customer. One of the resume copies
got me a better job offer, and I took it. As I submitted my resignation
letter, soon late at night I got a phone call from the CEO of the little
company: He told me that he would accept my resignation "with prejudice" which
didn't really mean anything. He was also drunk at the time.

Part of the job of a CEO is to keep key employees happy. That CEO had been
treating me as excess baggage, with the mushroom treatment (keep the employee
in the dark and feed them BS) until I became important. Then at one point, in
the hall, as apparently an off hand comment, with some resentment and no
details, elaboration, or discussion, he said "You are becoming an important
person around here". Actually I'd just done some work for a week I'd never
told the CEO about, work that thrilled our main customer and in effect got us
sole source on a competitive software contract. I didn't yet know how
important my work was, and I didn't know that my CEO knew anything about it.
But apparently some high up guy at our main customer (the US Navy) called my
CEO and had a chat about my work. So, as of the mushroom treatment, not
letting an employee know they were doing well, etc., my CEO didn't discuss my
exceptional work with me. So, all he did was just make the resentful remark in
the hall. He was happy as a clam until he got my resignation letter which
suddenly put his future with the two customers at risk. He was CEO of the
little company, but that little company was just a subsidiary of a much bigger
company; so, no doubt, from losing two big chunks of business, the CEO's job
was also at risk. He was a dumb CEO.

2) Yup, the year 2000 bubble and crash hurt a lot of startups. But for a
startup, the flow of more equity capital is always a really bad crap shoot
that can be affected by anything including the hemlines of skirts of teen
girls, sun spots, and a war in central Africa, or a drought in the Amazon
valley. A startup just CANNOT depend or count on (count chickens before they
hatch) on future equity capital. Similarly for future M&A deals.

Instead, if the customers are still happy and the revenue is still there, then
that's about the best can hope for; in bad times, commonly anything more than
that can be just a red cherry on top of whipped cream on top of ice cream on
top of a waffle. Until the bad times pass, what's real is just the waffle. For
the going business, just keep that going, be glad there's no second Great
Depression, be glad some one customer, the source of 75% of the revenue,
doesn't go bust, etc., keep the revenue going, please the existing customers,
try to improve the business in promising, incremental ways, accumulate the
after tax earnings, keep watching for better times, and be thankful for what
do have.

3) Sure, there are lots of ways some lawyers can look for billings. One way is
nuisance law suits. So, sure, maybe start your business as a sole
proprietorship. As soon as have any decent revenue look into business
insurance to protect you from nuisance law suits and pay a lawyer to set you
up as an LLC. Then get to relax for a while. If are small, then filing a
nuisance law suit against you is not worth the time, expense, and effort. But
if are small and some lawyers do file, then -- IANAL but just thinking out
loud about what I'd consider doing -- let them sue the LLC. Shutdown the LLC
and restart the business under another name; contact the old customers, etc.
and keep going under the new name. Also patch the legal hole the lawyers used
to attack you. Also, as soon as have any decent revenue, talk to some lawyers
and get some protection against nuisance law suits. E.g., I just saw a
disclaimer by a major company saying that they don't accept, look at, or use
unsolicited ideas from outside -- right away I kept and indexed a copy of that
disclaimer and will be sure to use it when and if appropriate. Generally, need
some protection against law suits from unsolicited outside contributions --
IANAL, but likely YouTube has some legal walls against such attacks.

Once are a significant company, do check with more than one high end business
law firm and business insurance firm on being protected.

4) Sure, can have spies, worms, saboteurs, agents of competitors or unions,
thieves, etc. So, use some standard precautions, e.g., the standard rule in
security, "need to know". Maybe have some _bonded_ employees. Look into some
security firm checking the security of your organization, say, something like
a white hat hacker would check the security of your server farm or other
computers. Keep the intellectual property crown jewels nicely locked up. When
still small, for the daily incremental backup data, maybe have the CEO take
those home and store them in a box in his den; have multiple copies of full
backups stored with great safety, off site, etc. Make good use of encryption.
Etc. Nothing here is new; we're not the first to consider such things; so,
there should be some good advice readily available.

------
d--b
I love the difference of tone between this article and the usual Silicon
Valley pieces.

For me, the most important thing that Ron conveys is that being an
entrepreneur is an incredibly foolish thing to do. Silicon Valley created
myths of passionate geeks who worked in their mom's garages and went on to
make billions. Who doesn't want that?

But the reality of Silicon Valley today is that because of these myths, most
people work their twenties away for a chance to buy a lottery ticket...

------
sophiamstg
I think I must agree with you on taking it as a full-time job!

------
banku_brougham
TLDR; you will lose money because you don't know anything.

~~~
rficcaglia
you can make money when you dont know anything.

correlation vs causation

you only always make money on 2/20 :o

~~~
banku_brougham
Not an endorsement or evaluation, was simply summarizing the article. The tone
was my way to indicate my disappointment with an article that failed to life
up to the headline. For someone with years of experience he/she didnt share
any of the details that would have made this interesting.

------
CalChris
I remember Ron although I was unsure about the name. Fair winds and following
seas.

Unless it's in your background and in your DNA, it seems that angel investing
will end in tears.

------
lowercase_
Interesting perspective, but he assumes that everyone's experience will be his
own. First of all, he was in LA. I don't know of many success angels down
there.

------
RandyRanderson
It's impossible, with any certainty, for an investor to prove that his or her
judgement is better than random chance. This is high schools stats.

What I take from this is that this person doesn't have a grasp if high school
math or is not being honest.

Also if you listen closely to a lot of investors they'll basically tell you
their metric is "can I sell this to a greater fool?". This is why there is so
much investment in 'hot' areas when, in reality, those are the areas to stay
away from as the unicorn shares are likely already over-priced.

------
flylib
"If you want to make money angel investing, you really have to treat it as a
full time job, not because it makes you more likely to pick the winners, but
because it makes it more likely that the winners will pick you."

plenty of good entrepreneurs have great angel investing track records doing it
part time (Elad Gil, David Sacks, Aaron Levie)

------
logicallee
The investor names only "one way" to succeed (though alluding to a second one
that this investor does not name):

>To make a product that fills a heretofore unmet market need, and to do it
better, faster, and cheaper than the competition.

This is an insane sentence. Let's make it only slightly more insane to throw
it into starker relief:

>To make a product that fills a heretofore unmet market need that nobody has
expressed or even thought about until the company announces it, and to do it
absolutely perfectly, instantly without any development time, and make it free
for the consumer, while getting money from a sustainable high-margin source
and having a proprietary moat that makes it impossible for any other market
players to enter even a similar market. Also I'll add that the company must
have such strong network effect that the utility of any competitor's product
is negative (people would regret getting it even for free) unless the
competitor is able to get at least 98% market share.

That's pretty insane, and if you re-read what I quoted you will see it's the
same kind of insanity.

Why do people even write stuff like this.

-

EDIT:

Downvoters don't understand my objection. I'm not going to edit this comment.
If you don't get it, you don't get it. This investor _literally_ named "good,
fast, cheap" (except as: _better_ , _faster_ , _cheaper_ ) as three of four
requirements that must be met. (The fourth named requirement being "heretofore
unmet".) You cannot get more insane than this except in magical la-la land
where there are no trade-offs of any kind. It's absurd.

~~~
sidlls
It's not only a bit silly (I wouldn't say "insane"), it's trite even if it
were true. It's the tech wold equivalent of "folksy wisdom" about working
hard. There's sort of a truism about it, but it's not useful in the sense that
anyone can use it meaningfully.

~~~
logicallee
It is introduced with the sentence "There are a myriad ways to make a company
fail, but only two ways to make one succeed" (where the second is left as an
exercise for the reader.)

This introductory sentence does not permit the writer to follow up with folksy
and false bullshit. This is like my saying "there is only one way to prove
that a function will return the correct output for all input", then naming
that one way (wrongly, but unironically) as "copy it verbatim from a
StackOverflow answer".

The reader deserves more. Writers don't have the liberty to spread such
nonsense.

\--

Edit: I finished reading the article. It is outlandishly wrong. It says "There
is a small cadre of people who actually have what it takes to successfully
build an NBT (next big thing), and experienced investors are pretty good at
recognizing them."

This is demonstrably false: investors are demonstrably bad at recognizing
these people, who often go through hundreds of rejections (because investors
are bad at recognizing them) before building the next big thing.

Really, this article could hardly be more wrong.

You know less about investing and the world than before you read it.

On the other hand, you learn more about what an angel _thinks_ is happening,
so I guess it's a wash.

