Things I've learned during my first year (ish) of angel investing

In December 2019, I dipped my toe into the pool of angel investing — at least, that’s what I thought I was doing, but before I knew it, I had fallen in head first. As I was getting started, I had the good fortune of speaking with a number of experienced angel investors who had years of experience on me. I gathered all types of opinions, but my conversation with Brian Ma stands out. Our discussion quickly revealed how “green” I was. It went a little something like this:

Me: Hey! Should I get into angel investing?

Brian: Totally. It will be intensely collaborative, you’ll have fun, and you’ll learn a ton. Think of the investments as tuition.

Me: Great, I’m in! By the way, should I set up an LLC or get like a special bank account?

Brian: LOL, just write checks out of your checking account.?

Following Brian’s advice, I did exactly that — I drew my first checks right out of me and my wife’s joint checking account.

As an exercise for myself, I also spent some time jotting down my thoughts about what it would take to be successful as an angel investor. It wasn’t fleshed out; it was less grand strategy and more of a general direction I wanted to follow.

And with that, I set off on my journey as an angel investor. Looking back, I wanted to document what I have learned so far. This helps me to mark a milestone in my own personal growth. I’m also hoping that could provide some valuable takeaways for others that are thinking about angel investing with their own money some day.

The Theories I Set Out to Test

Now that it’s been more than a year since I’ve written my first check, I thought it would be worthwhile to turn back and think about what I’ve learned. As I started my journey in angel investing, I had a few notions and theories that I wanted to test out. With a bit of hindsight, it is interesting to see what turned out to be true, and what turned out to be false.

First, I thought I needed to be in person to be able to deploy capital, which I touch on in a separate essay here.

I also thought I should be a generalist. While I worked in Fintech, I thought it would be fun to open up my investing to broader areas. Instead of finding a niche, I would spread my efforts across the entire spectrum of opportunities. Doing so would allow me to learn from, connect with, and engage entrepreneurs who were solving the world’s most challenging problems.

While I had some capital to play with, it was not an unlimited budget, and so I had to be realistic about what check sizes I could write. However, if I could position myself as a strategic angel, I thought I might be able to get in. I had accumulated valuable operating experience at Remitly, helping to scale multiple businesses and initiatives over more than half a decade. Perhaps that could be a differentiator.

And if I couldn’t get in directly, I could also leverage AngelList syndicates. Minimums were very reasonable and there was a wide variety of deals coming thru. I could piggyback off of other syndicate leads’ deal flow and diligence.

One thing that I did know off the bat was that I wanted to focus on customer-centric teams.?

I was trying to pattern match towards the cultural values that I had seen work spectacularly for Remitly in scaling to what is now a unicorn Fintech company. I thought if I could find a company that shared that aspect of our culture, it was a sign of a team that could prevail in the face of the myriad challenges of startup life and grow.

Finally, I told myself that I wasn’t going to worry about making a return on my angel checks. I knew this was super risky. And even if I was successful liquidity could be more than a decade away. I agreed with Julie (my wife) that we would mentally write off the money as gone. It was tuition, in the service of learning something new and growing. So what did I learn?

What did *not* hold up

Now, you might be wondering: Which theories held up, and which ones didn’t? Looking back, the most surprising were the ones that did *not* hold up.

Let’s start with the first one, since it’s fairly obvious, given the current state of the world: I did not need to be in person. In February 2020, I had lucked my way into an invitation to Y Combinator’s Demo Day. I was planning on flying down from Seattle to SF to attend Demo Day in person. Then COVID hit. My plans, along with everyone else’s, went straight out the window. We all ended up hunkering down in our homes. But, as it turns out, that was the best accelerant for my angel investing journey. I wrote about that experience in more detail here.

Next, what about my plan to be a broad generalist investor? Well, I quickly realized there was a lot of value in “sticking to my knitting,” as they say. While I love hyping up founders who are working in wildly different areas; like genetic engineering, robotics, and healthcare; there’s just not a lot of experiential or network value I can bring to the table for those sectors. On the other end of the spectrum, I could go super deep exchanging notes with founders in Fintech. Having been a Fintech operator for over half a decade, it turned out that I had something valuable to share and I could self reinforce many of those learnings that I had collected over the years. A couple months in, I realized this fact and began to let it go with my enthusiasm for Fintech. Now, when I do the rough math on my angel portfolio, it turns out that 60% plus of it is in Fintech.

When it comes to AngelList as a source of deal flow, while it did provide for a great volume of deal flow, it did not end up being right for me. It may be an excellent investment approach for many people, but for me, it did not serve the purposes of what I was looking for. It turns out, the fun, learning, and engagement I got out of my relationships with founders was the real value. When investing thru SPVs on AngelList (or other services) you often end up as one of many nameless LPs in a SPV. What I really valued was building a direct relationship with founders, and as a result, I found myself making the majority of my investments directly. While I occasionally still invested through SPVs from AngelList, Assure, and Sydecar (one of my own angel investments), more and more now they are with founders I knew well that were trying to consolidate small-check angels (like myself) into roll up vehicles in order to simplify their cap tables.

Now, that’s not to say AngelList can’t be a great vehicle for returns. If you feel comfortable with the risks of the VC asset class, but are more concerned about returns over relationships, then it could be a good option for you. But, as previously mentioned, fun, learning, and relationships were my primary motivators, so it wasn’t right for me.

What did hold up?

In addition to proving some of my own theories wrong, I learned a few important truths during my investing journey. For instance, small check sizes don’t really matter.

When I first started out, I was insecure about cutting small checks. My biggest check at the time was $5,000. While my max has crept up to $10,000, my average is probably still well below even that. However, I have been pleasantly surprised to find that that has rarely stopped me from being able to get in. As it turns out, if you’re a strategic angel who has operating experience scaling businesses, it can be a strong differentiator, and entrepreneurs are happy to have you. While I have had a few declines, they tended to be the rare exception. And the truth of the matter is, cap tables are easier than ever to manage between the variety of tooling out there (SPVs, roll up vehicles, Carta, etc), so the overhead needed to bring on a small check is now de minimis.

My key learning from this experience is that this is where authentic alignment of strategic and cultural values makes a big difference. I also think that there is something special about having high quality banter. I am forever grateful to the founders who have invited me to their cap tables, especially the ones who made exceptions because they believed this alignment would pay off in the long run.

Finally, customer centric founders continues to be at the core of what I seek to invest in. I’ve tried to remain consistent on this when making investment decisions, even though speed of decision making has compressed like never before. On this specific note, Jason Calacanis’s book, Angel has served as an incredibly useful blueprint for a consistent process driven approach and a set of questions that I have been iterating upon. I highly recommend it if you’re looking for inspiration.?

If I’m being honest, it’s too early to tell if this approach works. It will take several years to see if applying this filter works, but it still feels very valuable to me. It helps me find leaders who share my values, and that is incredibly grounding during this time, when the speed at which things develops feels disorienting.

New things I’ve learned

There were also a few unexpected things that I thought it was also worth noting here.

Along the way of investing in startups, I made a few investments in emerging manager VC funds. This was something I was not even thinking about because I never thought it was possible. But it turned out to be a great way to expand the span of my learning and networking.

Keep in mind: I’m not talking about Sequoia Capital (Alfred Lin, if you’re reading this, please call me!). But there are many emerging managers coming to market, and if you can be a friendly and strategic partner to these investors as they themselves are just getting started, you can get in with a small check. Also, all of my checks have been to investors in emerging markets, where the competition isn’t as fierce as it is in the U.S., so you can still get in early as an LP.

One other thing that I have observed is that teams that grow fast also tend to have fast growing businesses. While one and a half years is a short time horizon, I’m seeing some early signal that the founders that have been growing their teams? have been growing faster in terms of finding product market fit and scaling. To be clear, I’m still not sure which way the casual arrow is going yet. It could the case that the founders who’re quickly adding to their teams are getting leverage faster, focusing harder, and putting more resources toward solving customer problems. Or it may be that the teams that have achieved product market fit, can and need to grow their teams because of that strong pull of demand from their markets . Time will tell if this is a legitimate distinction in the long run, but right now, I find myself encouraging more founders to take more risks in hiring.

Looking Toward the Future

Since I’ve only been angel investing for a little over a year and a half, it’s too early to tell if I’m any good at this yet. But what has become apparent to me is why I’m doing this, and that comes down to three things: to have fun, to learn, and to build relationships.

Without a doubt, angel investing is incredibly fun. It’s effectively become my hobby, and I’ve been drinking from the fire hose in terms of learning. Walking alongside and supporting smart, hard-working founders has both illuminated the problem spaces they’re in and shown me what it takes to successfully launch a business within them. And the people I have gotten to know, from ambitious entrepreneurs to other angel investors, have been a huge source of friendship. Especially during a global pandemic, it’s been wonderful to find this sense of community.

Again, I’m not doing this to make money. The risks involved in investing at this early stage are too great to expect anything else, and that’s why I’ve chosen to focus on different motivators for now. And if I ever do make a return, then that’s a very nice side effect. But the benefits from the fun, the learning, and the friendship more than make up for that risk.

These three reasons get me excited to continue angel investing, and if that sounds like the right thing for you, I highly recommend cutting your first check! I’m happy to talk more about my experience, whether you’re a seasoned investor or just getting into like I am, so don’t hesitate to reach out if you’re interested to learn more!