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 :)
If they really believe in what they're doing, they won't want to give chunks of it away so cheaply. Conversely, if they're willing to sell on those terms, wouldn't you be concerned that they aren't serious?
If they're college kids or new college hires, you'd probably banking on them not knowing how valuable whatever they're making is.
Angel Investors get huge stakes for their small high-risk outlays.
> We have a new standard deal at YC—we’ll invest $120k for 7%.
> This replaces our previous standard deal of on average $17k for 7%, plus a SAFE that converted at the terms of the next money raised for another $80k.
Originally, before they invented the SAFE, there was no SAFE in the deal
Yeah, it entirely depends on where you're positioned as an investor. If you have great deal flow, then you can limit yourself to cool kids. But if you're more obscure, it makes sense to seek a comparative advantage with undervalued companies.
Oh, sure, but angels typically don't lead series A.
And yes, finding needles in haystacks does happen. But for any founder who really has the knack, it only happens once :-)
Just that they have higher odds.
we already have one person chime in with a counterexample (the person you replied to) and that is a very common experience. No, experienced investors are not pretty good at recognizing them. It's hilariously wrong to claim they are.
Though I'd say a lot of that is of course positive selection - the best founders self-select to Benchmark/Sequoia/A16Z, and to Greylock/Accel.
so you can have a 100% success rate (investing only in founders that show up with a box already pooping bars of gold) while having a 0% ability to identify successful founders.
a high hit rate does not mean you can evaluate founders correctly.
Keep in mind that for every Series C company that's pooping gold bars still 90% will fail, and a lot of investors are gonna lose money investing at that stage.
will get you a 100% success rate at getting conned, btw.
Of course some investors have better results than others. That would happen if they were all choosing to invest or not at random.
I really do question this. The "problem of induction" 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.
Want to know why these people can be recognized by experienced investors? At least part of the reason is that they know who looks like an NBT builder to other experienced investors. I would assert that this makes a massive difference in a founder's ability to close rounds and continue executing.
It's fair to say those weren't average reactions.
> And Graham knew that he had his own biases. “I can be tricked by anyone who looks like Mark Zuckerberg. There was a guy once who we funded who was terrible. I said: ‘How could he be bad? He looks like Zuckerberg!’ ”
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.
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?
So, pro tip: If you want to successfully invest, treat it like gardening rather than gambling.
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.
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. :)
Thanks for using the term "nouveau riche". Don't know why, I haven't heard it since college, but made me laugh.
The #1 thing a startup can do to survive is to be as stingy as possible with their capital.
Obviously super fancy offices, lavish meals, etc should be red flags, but you can’t generically say “be stingy” – it’s more like find the most efficient way to use your capital (which may include seemingly inefficient things that are actually required).
While not going bust, I had a similar experience. In the early stages, you think you can do everything yourself, and you can. Network, hardware, software back and front, systems, the lot.
So once we had a little success I found it very hard to get my cofounders to spend a bit of money on some relief. Ended up paying up for some guy who wasn't compatible, and let him go soon after, which soured their taste for hiring entirely.
I would add, I think it's usually best to wait until the need is crystal clear. "We think we're going to need this in a few months" is not generally a good reason to spend money now, even if the case seems airtight. Circumstances can change. Of course the exception is when the purchase is needed to start a chain of events that you need to initiate, even though it won't come to fruition for a while.
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.
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.
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.
Having your own equipment is a CAPEX and investors don't like to see those on a balance sheet at all due to various accounting reasons. Mostly its seen as a burden. Cloud is an OPEX and investors seem to prefer renting to owning.
Personally I don't understand why spending 3x more is more attractive to investors, but often the technical reason being right is superseded by the business logic.
"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).
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.
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?
Did I miss the story, did you talk about it somewhere?