Angel or LP: How to Bag a Unicorn

What's the best strategy to bag your first tech Unicorn? There are two main paths investing in early stage startups. You can be an Angel investor, making direct investments into startups. Or a Limited Partner (LP) investing into Venture Capital funds. The two are not mutually exclusive - I do both! Here’s my quick take on key differences, the pros and cons. What to consider to make the most of your mula.

Accreditation:

• Thanks to the JOBS act, anyone with any level of income/net worth can be a direct Angel investor in a company.
• To be an investor in a VC fund, you have to be an accredited investor. To qualify you need to make over $200k/year ($300k for married couples) or have a net worth of over $1M?excluding the value of a primary residence.

Indexing:

• As an angel, you should be prepared to invest in 40+ companies to bag one unicorn. AngelList data shows on average angels with 50 startup investments see an IRR of 10%, where 10 investments delivers just 6% IRR, and 1-5 delivers 0% IRR.
• As an LP, the VC fund is your defacto stable of startups. The companies in the portfolio start out looking more or less the same, and over the years, some burn out, some trot along, and a few grow wings.

Access:

• Many Angels have exceptional networks - they were early at Facebook, graduated from Warterloo, or been through Y Combinator - and therefor have direct access to founders getting funded by the top VC firms.
• Getting allocation in the most promising startups is competitive. If you do not have this kind of network, you can back a VC fund who has these relationships and access.

Expertise:

• Angels do best when they invest in what they know. Angels 2x their return when they invest in companies where they have 14+ years of relevant industry experience.
• LPs can get exposure to growing industries (ie climate tech) or markets (ie Africa) outside their wheelhouse by tapping the expertise of the VC General Partner (GP) and their team.

Minimums:

• Angels are generally writing the first checks in a startup, so founders are often willing to accept investment as small as $10k or $25k.
• VC funds generally have high minimum investment, upwards of $1M. Occasionally a fund like Spacecadet Fund 1 will have room for smaller checks ($10k! $25k!). You can apply to be a Spacecadet Limited Partner here.

Timing:

• An angel investment is a lump sum, a single wire. When you commit $100k to a startup, you wire it all at once.
• An LP investment is wired in installments over 3+ years. When you commit $100k to a fund, your first capital call will be for some portion, like 25% ($25k).

Fees:

• Angels pay no fees: you source your own deals, do your own diligence, and manage your own money.
• LPs pay a management fee to the GP to actively invest their capital. "2/20" is the most common management structure.

Reporting:

• As an angel, responsibility for tracking startup performance is on you. Early stage investments can be locked up for 7-10 years, so you’ll want a system for following your investments.
• As an LP, you get sent quarterly reports and invited to annual meetings. The GP is required to provide regular updates on what each investment is valued at by the market.

Angel or LP, the path for you may be super clear. Angel investing makes a ton of sense if you’re looking to make 40+ investments, have great access to deals with top VCs, and manage your own process. LP investing on the other hand is a great path if you want to bag a unicorn in a single bet. And if you’re looking to put a good chunk of money to work, you may be a great candidate for both.

Successful Angels, Fellow VCs, what am I missing in this list? Any other things to consider when it comes down to making angel or LP commitments? What do you recommend the best strategy for bagging a Unicorn!