The truth about angel investing from 70 deals and $400K invested
Most people think angel investing is “high risk, high reward”, but that’s not true.
More often than not, it’s actually high risk… low reward.
After nearly 15 years of early-stage investing, here’s my approach.
One of my 77 direct investments 𝘢𝘭𝘮𝘰𝘴𝘵 paid out recently. It’s a SaaS company, based in the UK, in which I invested $15,000 ten years ago.
(This time frame is common, by the way. If a founder tells you they’ll exit via trade sale or IPO in 3-5 years, run the other way.)
As it transpired, the buyer pulled out.
But I wasn’t disappointed.
That’s because I invested at a >$5m valuation and ten years later, this buyout would have been valued at about… $10m.
Taking dilution into account (the company raised more money after I invested), my return would have been about 1.5x.
That’s +50% in 10 years… or 4.14% CAGR.
As successes go, that’s pretty awful.
Assuming it’s true that 9 / 10 startups fail, and my next 9 investments pay out zero, then I’ll be down $127,500.
For many investors, that’s the reality.
Fortunately, I’ve made some luckier bets, but it could easily have been this way for me too.
So, here’s what I do now:
1. I only invest in companies where there’s something more than money in it for me. Does the investment give me some kind of access I couldn’t get elsewhere (e.g. I invested in a musician that came with tickets and back-stage passes)? Is there genuine impact? Is it a cause I want to contribute to?
2. I forget “the power law”. I don’t (and probably never will) get direct access to the very best early-stage deals. I don’t move in the right circles, and I don’t write big enough cheques. So instead, I’ve backed two early-stage funds as an LP. They have much better access than me.
3. I’m only doing direct investments at a price that reflects the value today. I’ve had enough of watching founders try (and fail) to grow into the valuation I agreed to. Now I’m only investing in “rational startups” that have traction and a realistic chance of growing by 10x based on their current trajectory (and not just hope).
Anyone have a better idea?
P.S. At DQ, we’re working on an entirely new approach to early-stage investing, aimed at creating a fairer chance of a return for early-stage investors and making it easier for founders without unicorn ideas to raise startup funding. Follow me to find out more.
