Every investor has a theory when it comes to successfully investing in startups. But turns out, it’s pretty hard to be right. Even the best venture capital firms in the world invest in complete disasters all the time, and they also mistakenly pass on some seriously successful ones.
And it’s even less straightforward for me, a solo angel investor who doesn’t have a full staff of analysts helping me make investment decisions.
Not coming from a lot of money, I don’t have the luxury of blindly stroking checks. Rather, I had to diligently learn about angel investing as an investment class to hopefully increase my odds of success.
As you explore angel investing, here are some questions I can help you answer:
Is angel investing right for me?
Why should I start now?
How to start: angel syndicates
How to do your first deal
The TLDR Takeaway: In many cases you still need to be accredited (see below for definition), but your Pomeranian's little winter vest doesn't need to be lined with real diamonds to invest in startups. And when done right, angel investing can be a wonderful addition to your portfolio and a ton of fun!
There’s no way to cover this in one attempt, so I’ll be writing deeper dives here & on Twitter @danhightowerjr.
Is Angel Investing Right For Me?
As glamorous as angel investing sounds, and while it's true that some people do it for the notoriety, you can’t get around the fact that investing is about returns.
Some public data exists on expected returns for angel investors (TLDR: ~3.5-6x total return). Other sources cite a 17-38% IRR. Anyone would be thrilled with those returns, but then there are the dismal reports that startup mortality rates are 70-80%.
So, if you're going to turn $1 into $10 through angel investing, you’re going to have to decide if you’re comfortable with the very real risk that your $1 could magically disappear.
Additionally, there are timescales to consider. Startup investments are less liquid than stocks for example. You’ll need to be able to hold these investments for years before seeing returns.
That’s a lot of uncertainty to stomach, but there are a few silver linings:
It works as a power law - A 70-80% mortality basically means 2 in 10 startups will survive to potentially generate a return. But, hitting one winner can return a lot, to compensate for losses. If you get into angel investing, building a portfolio is key to de-risking, and can significantly increase your chances of hitting your power law.
Small checks are okay - To help you build a portfolio, don't feel compelled to write large checks if you don't have the dry powder. Sub-five-figure amounts across several investments are fine- as little as $1,000 can work.
It is so much fun - If you invest early into a team that develops a real business, it's incredibly rewarding to be a part of that journey even if you're a small investor. The best investors find ways of adding value beyond the money, and you might provide an insight that unblocks a team all the way to unicorn status.
The current lack of angel investing return data also means that in 10 years, as more data surfaces and paints a clearer picture, it might become obvious that you missed out, kinda like when you’re forced to relive that time you almost bought 10 bitcoin at $200/btc.
So, if you have the financial means and you feel like the uncertainty is worth the potential reward, then angel investing should absolutely be a small part (~5-10%) of your asset portfolio, right alongside real estate and your 401(k).
Why Start Angel Investing Now?
Now you've bought in, and you’re ready to back the next Google! You’ve got great timing!
Historically, it has been very tough to invest in startups even if you wanted to. Before, you would need hundreds of thousands—if not millions—in capital. You would need access to the right deals. You would need experience evaluating those deals. But that’s all changing thanks to a few paradigm shifts:
It’s now more likely that you’re an accredited investor:
Modernization of the rules governing who is allowed to invest in private markets has led to an explosion in the number of accredited investors available to private companies. Now, you can invest in startups if you check any ONE of the boxes below:
Make >$200k in annual income or $300k with your spouse
Hold a Series 7, Series 65, or Series 82 license (I tweeted a guide to getting your Series 65)
Work at a private equity firm of some kind, aka a "knowledgeable employee".
$1M in net worth
The deal is crowdfunded (RegCF now enables startups to raise up to around $5M from non-accredited investors!)
There are fewer barriers to entry thanks to tech:
We've come a long way from the days when it was hard to view your 401k online and E*trade could get away with charging $12.99 per trade. We have leveraged technology to significantly streamline angel investing.
For example, AngelList’s Syndicate platform (see deep dive below), makes angel investing as easy as buying socks on Amazon. There are plenty of other options, so AngelList isn’t the only way to angel invest- it just might be the easiest.
If you’d like to get started now, check out our syndicate here: joindvc.com
Online angel investor communities are also popping up, for example Angel Squad, a new community of angel investors being assembled by the team at Hustle Fund, one of the most active pre-seed investors in the world, evaluating over 500 deals per month, ultimately investing in 5 deals (1%).
Aside from education from the Hustle Fund VC team, and access to Hustle Fund’s deals, Angel Squad members are carefully vetted. The community of angels can deliver the value of "the wisdom of crowds" - having smart peers to talk you out of bad deals and bring you into great deals is going to be insanely valuable. (I asked Eric who is building this community for permission to share -- they are not totally public about this community yet).
How To Start: Angel Syndicates
Angel syndicates are the most accessible & flexible gateway to the private market. They are all about unlocking startup deals for the “average accredited” investor, whereas traditional VC funds have been more of an exclusive club with each of the VC’s backers typically investing tens of millions into a single VC fund.
Angel Syndicate Overview
With angel syndicates, you can invest as little as $1,000 in amazing startups you wouldn’t have found on your own.
An angel syndicate is a private group of accredited angel investors (how many ranges widely, but you can think ~150 active investors), led by a syndicate lead, a very experienced investor responsible for finding great startups that are raising money and bringing them to the group.
The group then collectively invests in the startups that the syndicate lead finds through a Special Purpose Vehicle (SPV), which is just a legal entity created to make a single investment in a single startup.
An angel syndicate's average total check size into one SPV ranges widely, but you can think about it being ~$100-500K, which means each of the ~150 investors like you helps come up with that $100-500k. The required minimum investment per deal for you will range, but it’s usually around $1,000-$2,500 - some are as high as $10k.
You can pick & choose which deals you want to invest in. Don’t like a particular company that the syndicate is raising money for? Then don’t invest! Save that dry powder for the next one!
This optionality is groundbreaking and fundamentally different than investing in a VC fund, where you rarely get a say in which startups the VC’s management team picks.
How To Pick a Syndicate & Do Your First Deal
To browse syndicates, I recommend that you start your search on AngelList (a different platform, Republic, is coming up pretty fast too- which is great for investors who aren’t accredited yet). AngelList has over 200 active syndicate leads to pick from, and the platform as a whole has invested $2B into startups… with a B, which is way more than Sequoia’s latest fund.
When you pick a syndicate, you’re really picking the syndicate leader. So who are they & how do you pick one? Let’s meet one!
Meet Sundeep Ahuja! Sundeep is a 3x founder turned investor who was one of the first syndicate leads on the AngelList platform. He's since syndicated allocations in well over 100 companies including Good Eggs, Substack, Mosaic, and Mighty Buildings.
Syndicate leaders perform two very important functions:
#1 Find Deals-
Good syndicate leaders have deeply connected and their deal flow reflects that. You will see extremely high quality deals from the best syndicate leaders. But if they can’t find deals, then the syndicate members will leave for another syndicate. Beyond the resume check, you will want to experience their deal flow over time. Where do they tend to source deals from? For example, do they just recommend their buddies’ startups to the syndicate? (that’s bad)
#2 Help You Evaluate Deals-
Beyond sourcing deals, syndicate leaders help analyze the deal for the group and present the case for why the group should invest in this startup. More on this analysis later, but your syndicate lead should do a lot of the heavy lifting for you because it’s highly unlikely that you will have direct access to the founders or the full data room to do your own analysis.
It would be too much of a burden on the founders to have to connect with all 150 syndicate members. To help solve for this, sometimes syndicate leaders will record a Zoom FAQ with the founder(s) for you. But, if all they’re doing is just forwarding pitch decks, that’s no good.
#3 Support Founders-
One of the reasons that startups like to syndicate is that they gain an army of supporters (the angels, or LPs). Syndicate leads help the founders tap into the value of this network to provide a major value-add that a traditional VC firm may not be able to at the same scale.
Once you’ve found a syndicate you like, you’ll need to apply. You can be a part of more than one syndicate (no cap to how many you can join), so apply to multiple syndicates to diversify your deal flow. After you've been accepted into a syndicate, you will be able to see all of the available deals. If you don't like anything you see, you can just wait.
One day, after being accepted, you'll get an email that will look like this (scrubbed for confidentiality):
When you click "View Deal and Invest", you'll see the Investment Memo. This is the moment you’ve been waiting for: doing your first deal!
Doing Your First Deal
The deals that good syndicate leads put forward are highly curated and usually of phenomenal quality. Which is awesome, but it also creates a big problem for the solo angel investor who has to pick and choose carefully! At the end of the day, liking a startup and investing are two different things. And you’ll need a framework that you use to decide which ones you invest in.
For me, this is still a work in progress, but here’s how I approach it:
Digest the Info
I always start by reading the Investment Memo, or “Deal Memo”, which provides key information on the startup.
Memos are highly confidential overviews of the startups and the investment opportunity. If you’d like to read one for yourself, I published a redacted version of one I wrote here.
In the memo, you should see a brief overview (30 second read): covering the big hairy problem, solution statement, how it works, the syndicate lead's personal reasons for why they like the startup, and a historical timeline of the startup (like maybe they were a YC company, or who their other VC investors are). You might also get company highlights/stats on the company like historical user growth/revenue growth, cash on hand, etc. Beyond the brief overview, you should expect to see deeper dive paragraphs into problem statements, product, traction, business model & competition, and team overview.
Ask Three Big Questions:
When I’m finished reading, I use a simple framework for picking the startups I invest in:
What happens if this goes really, really well? Can I see a clear path to $1B in annual revenue?
Could I help this startup in some material way?
Will this startup help further humanity?
If any of the above answers are no, I’ll pass.
Also, if I have too many unanswered questions after reading through the material, I will also pass on the opportunity because this is usually all the info that you will be given as a solo angel investor. Keep in mind that from an etiquette perspective, check size correlates with ability to ask questions. If you're putting $1,000 into a startup that's raising $1M, feel free to ask the syndicate lead questions, but don't expect to be able to meet with the founder(s). But on the other hand, if you’re putting in $50k+, then you might ask for full due diligence materials/founder convo.
If it Passes the Test, Then I Dig Deeper:
At this point, I’m usually pretty excited! So, I just want to check a few more boxes before I make a decision. Those boxes are 1) demand and 2) competition.
If I know a potential customer that would seem to be a good fit, I’ll call them and run a “hypothetical business idea” by them (to maintain confidentiality). If they seem interested, that’s huge. If they mention a competitor or two, I’ll shift gears to a competitive analysis.
If I’m Still Excited, I Invest:
I’m 100% investing if I feel like there is demand and a defensible competitive advantage after my analysis.
The specific amount to invest is a personal preference and a bit complicated. But my range is anywhere from $1,000 to $25,000. I hope to cover this in depth in a future post.
Oh, also, these deals move fast. I've seen some close in less than a day.
There’s no way to cover this topic in one attempt, and you probably still have a ton of questions!
I’ll be writing deeper dives here & on Twitter @danhightowerjr.
For now, if you’re an accredited investor, head over to our syndicate DVC, and check out the deals we have going on right now. And please share this:
The content here is for informational purposes only, and should not be taken as investment advice. You must be an accredited investor in many cases. All views contained herein are my own and do not represent the views of any other organization.
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