
Guide to Angel Investing - anishgodha
http://anishgodha.com/2018/06/15/guide-to-angel-investing/
======
chriselles
I had the chance to attend the 1st in-person YC Startup Investor School back
in March.

All content here:

[https://investor.startupschool.org](https://investor.startupschool.org)

Really useful data driven investing fundamentals.

The networking connections and opportunities have been invaluable.

Thanks to YC and all who attended.

~~~
hal9000xp
I watched all of these lectures online. It's truly insightful!

I'm too poor to be angel investor but I do like to listen angel investors and
venture capitalists because they can give me insights about how to find
brilliant ideas and what's common signs of prospective ideas.

I think advices from ex-entrepreneurs who turned into angel investors or
venture capitalists are much more valuable than from first or one time
successful entrepreneurs because they know both sides. It's hard to impossible
to distinguish talent from luck based on one time success. But if someone
repeatedly find unicorns over the years, it's most probably talent and I would
listen that person with great attention.

One of my key takeaways from these lectures - really good idea for startup
often sounds like bad idea because if idea sounded obviously good it would be
most probably already executed by some big corp.

This takeaway teach me not be overly dismissive of ideas which are not
obviously good and be careful with ideas which sound obviously good.

P.S. I know that soft-skills (e.g. leadership) and team are very important for
success but it's not insightful information.

~~~
chriselles
Good post.

I’m constantly trying to learn both sides of the fence as a startup founder
and angel investor.

I truly believe learning how to be a better angel investor also helps one be a
better startup founder, and vice versa.

Two sides to the same coin.

One of my biggest takeaways from the in-person YC Startup Investor School is
how truly important reputation is.

While I’ve always worked hard to develop a good reputation, it was reinforced
just how incredibly important reputation and crystal clear communication is
between founders and investors.

------
startupdiscuss
I appreciate someone formally writing out their thoughts.

My instinct and conventional advice reflects the principles outlined in this
guide.

However, how do we know it’s true?

I know one entrepreneur who passed on the best deal of his life because there
was no traction and the team seemed to be bad (he didn’t offer how he knew
this.)

They had a great product but of course he discounted that.

It would be interesting to see what the data says.

~~~
anoncoward111
Ultimately the one with the biggest pockets wins in that scenario.

A firm that has enough money to fund 300 businesses will probably have a lot
less variance/cash flow problems than one that can only afford to fund 30.

The big fund won't pass on a murky deal because it can afford to be wrong.

~~~
dweekly
Weirdly enough most of the folks with large funds (e.g. mid-sized VC firms) do
not make a large number of bets because their MO is to take a board seat with
an investment. Because there's an effective limit on the number of boards one
can sit on and fulfill a fiduciary duty to each corporation, there are only so
many checks the firm will write. They are further constrained by fund timing
(having a few years at the start to deploy capital and generally ten years to
return it). Worse yet, they need one big success that will return the fund in
order to earn carry. So they have a fixed number of bets, one of which _must_
make it really big in less than ten years. Needless to say with all of these
constraints most VC funds fail to beat the public markets. Many VCs given
these constraints follow the advice in this article and invest mainly in
companies that already have good traction. The problem is that everyone wants
to invest in these companies so those that get in either overpay or have some
reason why they have gotten access to proprietary deal flow.

Angels that make small, passive investments can build very broad portfolios,
wait patiently over long time horizons, and make money when even a single
investment returns. Angels can afford to be wrong much more often and make
much edgier bets. Nearly all seed funding these days is provided by angels.

Over a broad portfolio, that's where the returns are.

Background: started two companies, invested in 50+, advised 15+, run three
funds/syndicates.

~~~
rdlecler1
Sequoia, Andreessen, Bessemer, Greylock have hundreds of investments, not to
mention the seed LP and scout programs. Yes, some of the really big growth
stage funds make fewer, but larger investments but that’s a function of
supply.

In a power law distribution or returns you need to make a large number of bets
to be in the big winners because the median is often significantly less than
the mean value.

~~~
dweekly
Without arguing against the power law distribution (which is real and
measured), the discussion here is more about vehicle. VCs usually have an LPA
that positions the fund as "smart money" (justifying the management fee and
carry) and therefore coupling investment with active company involvement which
must by definition hinder the quantity of investments made.

The above mentioned funds are longstanding and extraordinarily successful
series of funds - an individual fund typically doesn't make more than 30 or so
investments. There are certainly seed funds / programs like 500, YC, and Right
Side Capital that use different mechanisms (notably: passive investment) in
order to deploy more bets. The approach was arguably pioneered by Ron Conway
who was at the time derided for being "spray and pray" but was later found to
have exceptional returns due to the efficacy of "black swan" investing - which
is to say that pretty much all of the signals that one believes confidently
are good markers of a successful startup are wrong in precisely the most
important category-breakout cases. Consequently a humble investor desires to
both invest in a large number of companies, realizes that their active
involvement is likely to do as much harm as gain (witness returns on investor-
controlled vs founder-controlled companies), and constantly questions their
own assumptions with portfolio performance data.

But an overall model / LPA that forces you into a "smart money" model will
keep you from operating in this way.

This is where the advantage of the angel investor comes in - to take a bet and
to put the Venture back in Venture Capital.

The angle I press people on is: what macro trends do you believe to be true
that the market doesn't realize yet but probably will in the next decade? What
companies are playing to that trend? Clear opinions on this can guide you to
investments that outperform.

One example of this was the bet we took on Mexico seven years ago; VCs thought
we were nuts because they only followed headlines talking about drug violence
and hadn't kept up on rising household wealth and engineering+design talent.
We had very little competition in finding the best deals in the country and
those deals are now ripening - one is up 300x.

Perhaps this could be described as Buffet applied to angel investment - where
is there fundamental likely value that isn't fully appreciated by the markets
and where you have the patience and appetite to wait for the market to catch
up?

I don't see a lot of VCs operating with this kind of flexibility to be truly
thesis oriented.

I'm not trying to bash VCs here; for growth capital they are stellar - some
businesses really do need tens to hundreds of millions of dollars to mature
and that is where VCs shine. Not a lot of angel groups can pull together a
$50m deal! There is room in this ecosystem for both angels and VCs; each much
play to their strengths to succeed.

~~~
charlesdm
> One example of this was the bet we took on Mexico seven years ago; VCs
> thought we were nuts because they only followed headlines talking about drug
> violence and hadn't kept up on rising household wealth and
> engineering+design talent. We had very little competition in finding the
> best deals in the country and those deals are now ripening - one is up 300x.

It partially comes from discomfort of operating in foreign markets. Developing
countries generally also offer an additional risk premium if you get it right
(because there is unnecessary bureaucracy, corruption, etc etc)

As an example: I'm European. I think certain countries in Eastern Europe have
particular investment opportunities that are super interesting (e.g. Ukraine)
but I don't speak much Russian or Ukrainian and I don't fully understand the
legal framework.

Even with good lawyers it is hard to go into a developing market you aren't at
home in and don't understand and invest well.

------
riantogo
Can someone also share the actual steps of going about angel investing? If
through my network I hear about a team in say, Africa, looking for investment,
do I then ask them to list their project on AngelList? Do I then pay via
credit card and AngelList takes care of getting money in their bank? Do I then
get some form of legal contract specifying my share of equity? Who enforces
the contract?

~~~
buildbuildbuild
There’s a bit more structure in place. This is a great overview
[http://paulgraham.com/angelinvesting.html](http://paulgraham.com/angelinvesting.html)

------
mrfusion
I always thought it would be cool to angel “invest” with coding time and
expertise instead of money. Any ideas if that’s ever possible? Maybe that’s a
good business idea to match up coders with free time to start ups?

~~~
txmjs
Isn't this just the same as startups who hire engineers and "compensate" with
equity and don't pay salaries?

~~~
mrfusion
Isn’t that pretty unusual? Plus I’d want to be courted like an investor
instead of doing whiteboard interviews.

------
yani
Angels should be willing to take higher risk and their biggest motivation
should be innovation not return.

~~~
whb07
If an investment has outsized returns would it not be due to some innovation ?

Also the purpose of an investment is a return. I can’t tell if you’re being
sarcastic or not, but what you’re mixing up research funding with capital
investments.

------
lquist
_Entrepreneur has the best idea ever! He needs funds to build the product._

I believe it's best practice these days to use "they" as a neutral pronoun. It
seems like a small thing, but these little things add up.

~~~
repsilat
I don't think English is the author's first language -- see the use of "defer"
throughout the document. Maybe most polite not to nitpick.

~~~
adjkant
I don't think it's meant as a nitpick but more of a "hey, you may not know
this but here's a helpful thing". The comment seems to have been both worded
and received in that positive way and that's a great thing if you ask me :)

------
outside1234
Here’s my guide: 1\. Put your money in a wheelbarrow. 2\. Set it on fire.

~~~
dpiers
Why are you on this site if you don’t believe in early stage investing?

~~~
richardknop
This website is called hacker news. Most people here are interested in tech,
programming and such. Angel investors and VC people are small minority.

~~~
joejerryronnie
I would think people interested in startup financing/investing are a bigger
contingent of HN'ers than you assume. It is run by YC after all.

~~~
richardknop
Perhaps but if you look at most threads, they are very tech/hacker oriented
and most commenters, if you read their posts or history, are software
engineers here. I think that is at least 70% majority.

~~~
joejerryronnie
Yes, I would agree with you. As an aside, I always find it interesting when a
somewhat niche post comes up and you realize that HN commenters also include
some folks with very different careers than SWEs - e.g. Theoretical
Astrophysicists, Volcanologists, or Wind Farmers.

