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Why I’m Not an Angel Investor (georgesaines.com)
63 points by gsaines 8 days ago | hide | past | favorite | 51 comments

Here's an alternate way to look at it:

You're at FAANG making $250k salary (plus equity). You love the idea of a startup, but dropping to $150k salary + 1% in equity over 4x years isn't entirely appealing. (Setting aside starting your own.)

At the same time, you have a network of awesome, capable people who want to start their own business. These people are motivated, scrappy, and enjoyable to be around -- i.e. the traits YC looks for, which you can recognize. You'd help them for "free" anyway.

So take the delta in salary ($100k), and invest $50k @ $5M cap for 1% ownership into two startups a year. Four years on, you've got 1% in 8 companies with preferred stock & no vesting. Your net cash salary is equivalent in both situations, plus you earned equity in FAANG. You get to live vicariously through your entrepreneur friends, avoid startup FOMO, and relish in the relative comfort of a FAANG employer.

$5m cap? what is this, 2014?

four years later, you've got, in all likelyhood, three dead companies, and one company that has raised another round and you've been diluted, perhaps significantly.

don't use stories to make decisions.

(FYI, I've been angel investing for 15 years over 250+ companies)

I still see $5M-$6M pre-seed rounds for first money, friends & family rounds with just an idea & founding team -- the type of deal flow you're most likely to encounter while embedded in FAANG?

Post-revenue, post-YC seed rounds are going to be $10M-$15M+. Then again, I've also heard of companies raising at $40M+ in the last 6 months with less than $300k ARR. YMMV.

(I've only been angel investing for 3-4 years, and as a very part-time endeavor. 8 of 12 initial seed investments survived past SeriesA (so far), with 1 unicorn. Looked up your track record on AngelList: Mad respect!)

Can you add more reasonable numbers based on your experience. Also why is 2014 significant?

because very little is happening at a $5mm cap in 2021 in silicon valley.

other people have posted publically: a third of companies die, an third eventually return a 1x, a third go on to offer better returns than that. tweak that based on investor skill/insight/luck. i've done better but remember pareto.

This doesn't value quality of life. Startups, for many people, are a lot more fun than FAANG. If you stay at your FAANG job but invest, you have the worst of both worlds... a lower salary without the fun/excitement/pride of a startup. We have lots of angel investors, and I doubt any of them feel like they're getting a "startup" experience for their money.

Plus, I think there's some real problems with the math. Nobody is doing a $5M cap anymore, you have to somehow have really good deal flow to get two good $50k investments a year, $50k is a lot for an angel investing their own money, most companies are going to fail, and as soon as there's another round there's dilution.

Purchased equity suffers the same dilution as earned equity (on the same grant date), but with the added benefit of liquidation preference.

I'm sure the actual numbers are a bit different, but taking what you said literally - at $150k salary you're taking home $100k after taxes. At $250k salary you're taking home 160k after taxes. So it's not quite as simple, you're handing quite a bit to the tax man, although I'm sure someone more interested could find some useful tricks.

Great to hear from you, beambot, been a while. :)

Yeah, I think, though that this falls into the category of investing without hopes of market returns. You're just doing it for enjoyment. Nothing wrong there, though.

Most companies starting even seed closer to $10 million cap these days. But minimum investment can be as low as $1k on angellist syndicated deals. so for a 100k, you could do a 100 deals… if just for fun. Though it is time consuming, and I agree with most of the article. But I enjoy it, and am good at it, so I do it.

Just beware your taxes will require extra work as each deal issues a 10-K and TurboTax has no auto-import

VC’s don’t stress about doing their taxes. We just higher accountants. We don’t even worry about running our own companies. We higher founders for that.

Sounds like the kind of M.O. that should be common in theory, but maybe not so much in practice... Are the best startups really funded by FAANG engineers initially?

I don't know about "best", but it's part of why Silicon Valley is Silicon Valley. The place is just swimming in people who ended up millionaires after a successful exit, along with FAANG engineers who have a lot of money and, even if they don't have enough to own property in the Bay Area, still have enough to give $10k to a friend with no real expectation that they'll get any of it back. Combine that with a enough other people, and raising $100k is trivial, relatively speaking.

Someone who's worked at a FAANG has also seen how those places remain functional, which helps shape a startup's culture when growing from 10 to 100 to 1000 to 10,000 employees and (hopefully) can avoid toxic pitfalls that poison a company to a slow death with.

I have a similar background to OP and according to their definition, I'm not an angel investor either. But I think most "angel investors" these days operate like so:

1. I made a bunch of money at Unicorn X

2. All my friends from Unicorn X/classmates from Stanford/batchmates from YC are starting new companies

3. I write them a $10k check because I'm their friend

I don't think many of these people see these checks as return-generating but rather as a way to support friends, pay it forward, etc. Money is so easy to get these days, especially at the pre-seed level, that the highest-quality companies are not even running a formal process but instead just hitting up their network.

Yup. This is the profile of most of the angels I know. The math suggests that you can't make a lot of money from doing it, but that doesn't need to be the goal of such investments. To your point, you're just helping friends.

Also, there's a comment a little ways down about access to YC startups, and I think the comment misses your point entirely: it's quite hard to have your money be accepted by a promising startup. I'm not a bigwig/influencer in the YC scene, so gaining access to those cap tables would be pretty tough.

> Money is so easy to get these days, especially at the pre-seed level, that the highest-quality companies are not even running a formal process but instead just hitting up their network.

I very much agree with that. Seed rounds used to be, on average, a lot more formal and rigid in the past. Raising $10k-$100k today is far, far more trivial than it was twenty some years ago. The distribution of angels is far greater, there are simply a lot more of them all over the US than they were in eg the 1990s, everything is a lot more casual at that scale today. It was plain difficult to talk to small investors outside of a professional VC context back then (angel tech investors outside of SV in the 1990s were a bad experience overwhelmingly), the language didn't exist, the angel investors were more often very inexperienced, and the angels didn't tend to know squat about the technology industry or the Internet generally (again, outside of SV). Some combination of increased distribution, more real wealth nationally, tech spread (today it touches nearly everything at all times), and inflation debasing what $10k-$100k means now (you have to increase that by 77% (!) to adjust the 1996 dollar to 2021).

Yeah, a huge number of early twitter folks did exactly this.

I wonder -- what percentage of "angel" investors never expand beyond a portfolio of five businesses? Or... just one business, say that of a friend or family member?

Personally, if I'm ever financially capable of investing in a business to the tune of $25k, I think I would find a lot of satisfaction in enabling the dreams of someone smart and capable that I knew personally.

Obviously, going into business with friends or family is... extremely fraught. But, y'know, optimism.

Clearly, what I'm talking about is not really even in the same ballpark as what the author means. But I guess I'm writing this comment as a way to say to myself "I don't think I necessarily need $3.3M liquid to invest in a business."

And really, angel investing has never struck me as a way to really make money; more of a way to say, as someone with resources, "I believe in this idea, and would like to give it a chance to succeed."

> nd really, angel investing has never struck me as a way to really make money;

It's also CV padding / bragging rights because you do need to demonstrate a certain amount of wealth. A former colleague dropped $50k on a startup in ~2010, and has been plastering "Angel Investor" all over everything he does. That was his only investment, but it was enough for him to not STFU about it.

I'm not there yet in terms of personal resources, but what you're saying resonates with me. Like, I threw $5k at shares in a renewable energy co-op and felt good about it, even though I have no idea if that money is ever coming back.

There's a section of this article which computes an average hourly wage of ~$40/hr as the expected return on an angel portfolio of $500k which takes 2,500 hours to assemble and earns a return of 20%. This seems to be missing the point that the 20% estimate is an annual return, and not a one-time deal, once this portfolio is assembled. Theoretically it goes on for an indefinite time as the overall portfolio increases in value.

Great article otherwise... by the way, minor nitpick here:

> Some angel investors lose 100% of their principle.

Should be "principal", although some might cynically argue that the typo makes this even more true!

Thanks so much for the edit, arbuge, just updated my typo.

For the first point, that's actually quite an embarrassing oversight if I've misunderstood. In the books I read, I understood that the expected return was total, not yearly. So the standard math is that you get 20% of $500k PER YEAR? If so, gotta update the math on this one - the outcomes are radically different than what I report.

Yeah the standard returns data would be annualized, for example "average return ... in this study is 2.6 times ... in 3.5 years — approximately 27 percent [IRR]" http://www.angelcapitalassociation.org/data/Documents/Resour...

Around $320/hr then (less the discount you'd have to take for tying up your capital over that timespan).

Not a bad deal for many people, and you can make proportionately more on this per hour basis if you are able to contribute more capital to begin with.

$3.3MM as a bare minimum seems like way too much. The usual check size at an early/seed stage (re: angels) is around ~$25k, so this would mean having 132 companies in your portfolio. That’s extreme for anyone just getting started, even considering the “shotgun” approach.

It seems that most angels won’t have access to the “cream of the crop” as it were, perhaps that’s what’s skewing these numbers? (Worse companies on average would mean lower probability of success on any of them)

The author is correct that the return on average is 20%ish, but that actually takes several years if not decades. Most investors would be better off buying index funds - so you seriously have to enjoy this for it to make sense.

The 3.3m number is not the amount invested in angel investment, it is the person’s total liquid investment portfolio, of which 15% ($500k) is allocated to angel investing.

Angel Investments are very very illiquid.

and cut in half again for the 100% held back

10 companies at 25K for 250K put in and 250K reserve

>Most investors would be better off buying index funds - so you seriously have to enjoy this for it to make sense.

Data point of one but a friend of mine retired and got into angel investing. I guess he pretty much got out of it after a few years and I got the sense that he'd have done a lot better just in an index fund.

He does still do some angel investing but just for a few companies he feels especially strongly about.

I don’t understand this sentiment - that generally the best investing return is just index funds. Really? The dominant strategy in investing is also the easiest one by far, while also simultaneously being the definition of “average returns”?

No, if Angel investing didn’t have a commensurate premium, no one would do it. They would just do the easy way. Eventually markets progress to 0 profit (in theory - this has never been observed afaik), but in the mean time people make plenty of return.

The magic of index funds is dead-simple passive avg returns with a solid track record. They promise average returns - which is nothing to scoff at for sure and very appreciated, but they aren’t the end all of investing.

Also: that stellar track record (100+ years) of stellar growth also happens to be over the most economically successful period in the entire history of humanity. So many miracles have happened in the last 100 years that makes our society so different from the previous 10s of thousands of years of human history.

For a 5% annualized avg real return over the next 100 years, we’d need a global stock market of $7.5 quadrillion - 131x the current global market. For 10% we’d need a stock market of ~$785 quadrillion - almost 14,000x the current global market. We’d have to multiply our projected-to-stagnate population by orders of magnitude and pull off many incredible and increasingly insane miracles to pull that off: colonizing the entire solar system, AGI, aliens donating everything to us, and so on - while contending with ever depleting resources.

Relying on the passive growth of the global economy to invest is a “cheat code” quickly closing as it is, much less the best way to get returns.

End rant

> that generally the best investing return is just index funds

It's not, and I don't see anyone saying that here. It will give better returns than angel investing for the average person (i.e. people not investing in Uber, Stripe, etc.), though.

> No, if Angel investing didn’t have a commensurate premium, no one would do it.

If no one won the lottery, no one would play. That doesn't make playing the lottery a good investment strategy.

Exactly. These are power law economics vs index funds uniform distribution of rewards - but that’s a relevant caveat!

The trope of “should’ve just put your money in the index” is an implicit suggestion that index funds are the best place for it, but it should be noted that perhaps index funds are the best place unless you’re willing to undergo the effort to obtain the premium in returns considering the fact that those market beating returns aren’t uniformly distributed.

The lottery analogy doesn’t map here because there are no lottery firms, there are no lottery syndicates, there is no lottery-playing industry on the buy side because you’ve correctly noted there is no repeatable process to generate profits. There is with venture capital and angel investing because there ARE repeatable strategies to generate profits - and many do.

>No, if Angel investing didn’t have a commensurate premium, no one would do it.

It could be the same thing as (day) trading, where many people overestimate their ability to generate a return.

Also the "return" might not be financial, some people might just enjoy paying it forward, having the intellectual stimulation, taking part in a lottery, loads of reasons.

But it isn’t. There’s entire firms dedicated to it with internal returns far higher than the stock market.

There are just shy of an infinite of investments and investing strategies that have beat the s&p in average returns for decades on avg you can construct with historical backtest data without foresight (ie not just picking the winners given hindsight). There are published papers presenting these.

In your perspective, is getting rich (or even just doing better than the index over any time period) just a matter of time or luck with no room for any skill? Because the index fund beating all other investments would have that conclusion.

Some people enjoy it. A lot of people think they are smarter and will beat the average. Some might, most probably won’t.

Investing in an index fund is easy. Angel investing on the other hand takes a lot of effort. I hope that on average there is some return for it.

A lot of people do things that make little economic sense. (start a vineyard, airline, space company :)

>The usual check size at an early/seed stage (re: angels) is around ~$25k, so this would mean having 132 companies in your portfolio. That’s extreme for anyone just getting started, even considering the “shotgun” approach.

With social angel & seed investing, the numbers have really reduced.

My early stage investment portfolio is ~$250K input cost, divided between investments of $1k, $3k, $5k, $10k, $20k, and $50k. Most investments I am trying to shoot for are in the $5k to $20k range. In doing this I have realized that a shotgun approach is better than big check to what I considered the best companies.

Most of the investments are around significant gaps in the market, or products I really believe will displace an incumbent providing an impaired service.

Am way up, mainly from SPACs acquiring companies, but the lockup periods are really really long.

The early stage investments are around 10% of my portfolio, and less than 5% with my wife.

> Most investors would be better off buying index funds - so you seriously have to enjoy this for it to make sense.

I don't believe in primarily buying index funds because I think they:

thrive during bull markets and die off during bears (survivorship bias)

Have outsized risks when serving as a majority of a portfolio

Overly risky due to concentrations

Vulnerable to black swan events

Rewards bad companies by lifting their stocks, regardless of how effective they are

Provide inferior returns compared to value hunting

Limits ability to utilize option strategies

I know these opinions might not be shared by many, and I recognize index funds are generally much better than active funds merely due to mgmt fees, therefore I try to limit my exposure to them to less than 10%, not including my gold hedge.

$3.3m in liquid net worth is shockingly low. I'd expect a staff engineer at a FAANG to have that much.

EDIT: That's a weird thing to be downvoted over. Is it not credible for someone making $500-600k gross income to have a $3m+ net worth?

It looks like I misread the article so this is a bit of a moot point here, but I wasn't talking about $3.3MM in liquid net worth. I was talking about $3.3MM in angel investments (which are illiquid) - and that would mean at least $22MM in net worth.

I actually agree - I thought the number would come out much higher. Originally, I thought that you should only invest up to 10% of your liquid portfolio in angel investments, which implies a liquid portfolio of >=$5M, which felt more correct, but it was pointed out to me that angel investors are also probably more risk-tolerant, so I increased the number to 15%.

and doctors and dentists and lawyers

curiously, more angels seem to come from those than from staff engineers who plausibly should have better nose for potential outcomes

Portfolio diversification? Staff engineers already have plenty of exposure to tech through their jobs?

This is very good article. For many, after getting some kind of windfall, pitches start coming left and right. It is easy to think that angel investing is something normal rich people do. Personally I don't think it makes sense for most people, even with ultra high net worth it most commonly isn't worth spending the time on. Unless you really like it.

I went a slightly different route with similar reasoning:

- Recognized I'm increasingly helping new founders at an advisory level (tech around GPU/graph/cyber/fraud/data, business around b2b/go-to-market/fundraising), and am generally happy to help new founders with 1-2 calls, but limited time...

- Lucky enough to have some personal liquidity, where good to have X% be volatile, and some time to leverage my areas of market insights (e.g., light advisory for VCs/enterprises/...)...

- ... so I started lightly investing in early stage funds I like + offer to help the funds with a bit of dealflow + help the portfolio founders with light advisory. Wider portfolio, better due diligence, and I can provided more targeted help where everyone benefits.

Hey George, this is all good for the broader startup market but the stats are pretty consistent for investing in YC companies on their demo day.

70% die

6% are worth over 100 million

~1% are worth over 1 billion

With that in mind, why not just use your network?

Access and valuations. Although YC does much better than other incubators in terms of outcomes, the batch sizes are quite large these days and the best deals are oversubscribed before the batch even starts. There's a lot of money chasing deals. So unless you have a solid reputation, it's hard to get started.

Obviously, you can overcome that by just spending the time, building dealflow, etc, but it suggests that new angels won't get access to the 1% deals. One of my batchmates was Cruise Automation which has had a spectacular trajectory. I don't know for certain, but I suspect Kyle wouldn't have been willing to take $10k from me. :)

Totally agree. To that point, I was trying to do this on my own and it's nearly impossible. As a corollary, Pioneer Fund has something like 26 founders & staff + various software tools to review each batch.

And then, yes, if you think of $10k from the other side, as CEO I don't want 100 people in my cap table that I need to signatures from for every corporate action.

You both are right that you won't get into many of the "hot" deals, but I don't believe there's enough data to show those turns into the best returns.

I have also gotten into a hot deal or two as a nobody. I write to the ones I am interested as early as possible with what I like about what they're doing, what I think would be helpful advice, and how my experience may be relevant. I also write checks same day.

That said, its a numbers game, just like any form of sales.

I'm sorry for the digression, but why are these investors guys called angels? Can you imagine an angel that gives you an offer: a bit of help with your difficult situation right now for 25% of your soul?

Good question. The metaphor though would be something like: ... and your soul cost you $1 M to obtain in the first place.

There's something special about seeing the future and investing on a team with a dream. It's not the cash flow analysis of growth equity they teach you in school.

This is one unsourced data point, but Axios says "bootstrapped startups typically grow slower and cap out lower than do VC-backed startups" https://www.axios.com/mailchimp-potential-sale-intuit-talks-...

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