> 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 :)
A $5k check will give a super-early-stage "startup" (two or three college kids) with no salaries and about $1000/month burn rate ("living expenses" in the right market outside of SV) about four months of runway. You'd have to approach at a sufficiently early stage (like so: http://velocity.uwaterloo.ca/funding/velocity-fund/).
What share of the company would you expect for that kind of investment? If the amount would be trivial then why would you bother (little reward for so much risk), but if it's non-trivial then why would they accept your money, given how small the amount is compared to the value of their sweat equity?
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 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.
> 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
In my experience founders taking a 5-10k check often do it as a favor to an advisor they like and who can't afford to invest more. Maybe the advisor helped them out in the past, or their personal brand or connection are relevant to the startup.
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.
"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.
There are usually several of these $10K ones, especially from angels the founders like and want to have a longer term relationships with. Also, most initial development is either outsourced or done by the founders.
It's either part of the entire round, or it's gonna go to a founder, one of whom is an engineer if it's a tech biz, and it'll feed them for 2-3 months while they get the prototype together.
> 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.
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.
the article-writer OP claimed "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." which is hilariously and demonstrably wrong.
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.
They could be awful at recognizing them and only invest when founders show up with a box pooping out bars of gold already, and not at any point before then, since they're so awful at recognizing them.
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.
If they keep growing into bigger boxes pooping gold, then you've done a pretty good job as an investor. It's all about IRR; if you invest and your investment grows, it doesn't matter what stage you invest at.
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.
of course, I said "100% success rate", under the scenario I sketched they're great investors. I just showed that this doesn't mean they can recognize the cadre of people who have what it takes. They could be 100% successful while having 0% ability to recognize anyone whose boxes aren't pooping gold yet.
Genuinely curious if your choice to group those investment firms is intended to imply something about them - such as they generally work together/compete with each other, belong to the same tier, etc.
>Benchmark Capital has a pretty small number of bets, and a pretty high hit rate, from my perspective. They certainly seem better at picking than most.
Of course some investors have better results than others. That would happen if they were all choosing to invest or not at random.
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.
And also memory is very tricky. I imagine there are lots of people who met Zuckerberg thought he didn't have it took, but now believe they always thought we was going to succeed. That's why I suggest angel investors write down everything they thought about an encounter with someone immediately after the meeting. Why you think they'd succeed and fail? Then when you follow them in the future you can compare your notes to what happened and learn. Otherwise it's really easy for your brain to put together a completely unrealistic view of what happened in the past based on what's happened since.
I remember an article where someone said they were doing this in the Army, writing / saying "this guy has the potential to be great" or "this guy will wash out quickly", and discovering 20 years later that their predictions had no relationship to reality. (Can't find that article anymore though.)
In Facebook's amazing case, Zuck got $500K from Thiel almost immediately out of the gate, after a little traction and a bunch of backstabbing as to who at Harvard college controlled the company.
I totally agree. In not so many words, the author explained how implicit bias works. It's not so different from the processes that shape the incoming classes of prestigious universities.
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.
There's tons of companies like Clinkle, where the founder literally and figuratively looked just like Zuckerberg. Looking the part doesn't guarantee success, but it often does guarantee a few huge rounds of funding, at very impressive valuations.
Clinkle got $25million before they even built a product, from the tsunami of money raining down all over Silicon Valley post-Facebook IPO. Very different from Facebook which actually had traction.
Well Sean Parker and Peter Thiel seem to have picked up on it in the very early days. Not to mention the fact that the two biggest/best VC funds co-investing for the first time, letting them take money off the table.
Every successful company will have a list of early investors. But not only is the list of those successful investors inconsistent (some startups were backed by Founders Fund, some by Sequoia, some by KLCB, some by Benchmark), the list of companies within the portfolio of a single investor (Founders Fund, to pick your example) is far from being 100% homeruns.
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.
Unless you saw something else, he was making a joke about having his own biases, not that he could identify Zuckerberg due to keen founder detection instincts:
> 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!’ ”
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.
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.
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.
YC also basically does a lot of training, mentoring, etc. I don't know how much of that most angel investors provide. But YC is not merely rolling the dice. They are also doing a lot of weeding, watering, making introductions, sharing wisdom, etc.
So, pro tip: If you want to successfully invest, treat it like gardening rather than gambling.
This is a really interesting point about YC. I've heard before that in markets some companies need to fail, their talent and assets act as "fertilizer" for helping the other companies grow.
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.
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. :)
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.
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]."
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.
It’s all a balance act. My last startup went bust in part due to the fact that we avoided hiring as long as possible in order to save money. In doing so we missed our inertia when we first started and we’re hot, and as we dragged on we didn’t have the diversity of talent to help do the things we were bad at (and didn’t want to do) ourselves.
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).
> My last startup went bust in part due to the fact that we avoided hiring as long as possible in order to save money.
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.
Lean, not stingy. It's about reducing waste. I'm on my third company, stingy would kill us, waste would kill us. But, gotta buy the things you gotta buy, when you gotta buy them. Critical difference between Lean and stingy. Maybe frugal is the right word.
> gotta buy the things you gotta buy, when you gotta buy them
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.
i have been lucky - multiple exits, 1 unicorn (and more importantly half a dozen fails)...and in that experience stingy always wins in hindsight. if it doesn't feel painfully stingy, be more stingy. the future You will thank you every single time, regardless of outcome.
I was part of a startup where the founders were older and the team was older. The technical competence and the competence of the team were amazing but I wouldn't characterize the team as "working like animals." However, the founders were pretty loaded and put in the initial 1-2M. We had a pretty good exit after less than 2 years.
Surely you can succeed without working like an animal? You probably can't take it easy like with a larger established company, but it doesn't mean you have to run yourself to into the ground in order to be successful.
Normal employees should work hard but not ridiculous amounts. Executives, whose compensation is highly tied to stock value, should be animals, at least in the early pre-revenue stages. That is my opinion.
Well, it's a marathon, not a sprint. A CEO that isn't taking care of him/herself isn't taking the long view. Sacrificing your health and not making time for thinking big thoughts is a bad way to lead a company.
There is a small subset of people who are able to work 80+ hours weeks without end (and are also intelligent, conscientious etc.). I think a significant portion of highly successful people belong to this group.
There's a big difference between working super hard and working so hard that your health fails. If you aren't pushing 60 hours a week, you aren't even trying. At a startup, so many things are out of your control, but one thing you can control is working hard. All that time and effort, and failing because some other company out-hustled you is the worst reason to fail of all.
Burn-out is a thing. A CEO that isn't making time for focussed reflection can very easily get stuck in 24x7 fire-fighting mode. A tired, burnt-out CEO won't be finding creative solutions to problems.
The game of international capitalism is one where if you aren't working both smart and hard then somebody else is going to eat your lunch and leave your company's corpse on the side of the road.
Most ideas don't exist in a vacuum and until you get your name associated with your market you're running the risk of someone faster stealing the buyers' hearts.
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.
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.
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.
I am a huge proponent of self-hosting, but there's other considerations when it comes to doing something like cloud - namely, CAPEX vs OPEX (Capital Expense vs. Operating Expense).
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.
Do you have the money to fund it yourself? Do you have the network you need to greatly increase your chances of success at each stage? If so, definitely take that option. If not, the semi-retired guy isn't semi-retired because he gives his money to people that aren't highly motivated and hungry for success.
It's pretty much the same issue as with FizzBuzz: You'd be completely shocked at the insane ratio of people passing already the very basic smoke tests of good due diligence.
"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).
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.
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?
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.
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.
With hindsight would you take the same path with your career and funds? I find myself at this crossroad right now, both financially and professionally, so found your article useful - thank you.
If you're asking me this question because you hope my answer will inform your decision that's the wrong reason to ask. This is an intensely personal choice, and what you want out of life is very unlikely to be the same as what I do (that's what makes trade possible!) I'm glad I did it despite the fact that it cost me a lot of money because I know that if I hadn't tried I would have regretted it more than I regret the lost money. But that's just me.
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.
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 :)