Why I stopped angel investing (and why you should never start). Part 1

I started angel investing almost by accident, which sounds rather strange. Who will "accidentally" invest tens of thousands of dollars in highly adventurous enterprises? Well, I did just that.

A friend introduced me to Clayton Christopher, who was raising money for his new alcohol company, Deep Addy . Their first product, sweet tea vodka, was great and he was an experienced entrepreneur, so I joined the project.
')
Investing was an exciting, interesting process. When the company became successful, I told everyone that I had invested in this new vodka that everyone drinks in Austin. The taste of victory made me drunk, and from that moment I was hooked. I began to invest in companies right and left. I became an ardent supporter of angel investing. I wrote about how great it is and recommended that everyone do it and help a lot of people start a business.

I was wrong.

I completely stopped angel investing, and I also advise you never to start.

Frankly speaking: business angel investing is a great activity. When competent people do it properly, great companies are created, and everyone benefits. I do not change my position about the activity itself, only about who should do it.

I hope that by the end of this article you will understand four things:

• Why I stopped doing angel investing
• Why you should never start angel investing
• Who should do angel investing
• What to do instead (and how to invest in this area)

The story of my angel investing

I want you to have an idea of ​​my experience in angel investing. I find that 80% of everything that was written about this activity is complete nonsense, created by inexperienced amateurs who have never done this. This does not apply to me.

From 2010 to 2014, I invested $ 1.2 million (my own blood) in about 80 companies. 36 of them were direct investments. You can see them on my Angellist page. I invested the rest of the investments through two funds where I had the status of a limited partner (LP) - the seed fund ATX and Evlove VC, and also through one fund that I regularly consulted.



I invested my money well. I want to emphasize that until the money is in your account, any profit is ephemeral. And at the same time, I can say that a fivefold refund of my 1.2 million is guaranteed. And over the next 6-8 years, thanks to the intra-firm return on investment, I can get a 20-fold (or more) return on my investment.

I also gained fame through my angel investing. New York Magazine praised me as a leader in this kind of investment trend. I wrote about some of the projects in which I invested, created a series of posts on crowdfunding - and both of them attracted a lot of attention.

Thanks to these posts (and not only them), hundreds of companies began to contact me with proposals to invest in them, I took part in crowdfunding and angel investing conferences, I was asked to write for magazines, invited to interview live for documentaries and even offered a role in a documentary TV show about angel investing (which never went on the air). I am also the leader of the best incubator for consumer-focused startups in the country - SKU.

This is not bragging. With all this I am a small fish in the world of angel investing. I told you all this only in order to prove that I have something that most people do not have who write about angel investing on the Internet: I have real experience and success in investing real money in real companies.

Why I stopped angel investing

There are two reasons that I personally stopped investing in angel investing:

1. Few good people who want to invest in;
2. Angel investing is a waste of my time.

1. Lack of good people.

Many people say that startups and the world of technology is an economic boom. From an objective point of view, it is not. Yes, companies get tons of money, and yes - it contributes to higher prices, but the boom is still far away.

There are many ways to see this, but one thing is obvious: if everyone talks about a boom, this is not a boom at all. Someone says that company ideas are crap, and startups don't solve problems. This is all nonsense. In fact, I could be convinced of the opposite: most of the latest developments, aimed at making the world better, are carried out in America precisely because of startups. Certainly not thanks to on-writing writers talking about technology issues.

Let's unite two factors together - huge money that is invested in developing companies, and brilliant ideas of startups. The result should be something really winning, right? Still, the whole point of investing is the most efficient use of invested resources.

So, since there is enough money and good ideas, what's the problem?

The problem is in people.

In entrepreneurship, it’s great that you don’t have to meet investors ’expectations in order to start a company — you simply start a business without permission. But when huge capital is allocated to the development of all these amazing ideas (in addition to the fact that in the last few years, entrepreneurship has become sexual and fashionable for a certain group of people), it turns out that companies base a huge number of people who absolutely should not do this .

I'm not talking about social justice or trying to denigrate someone, but a hundred years ago we could call these people charlatans. But actually it is not. Most of them are very honest people, and their ideas are great. When I say that “they should not start a business,” I mean, in fact, they cannot effectively manage startups.

Ultimately, only one thing is important: can you do the job? Over the past 18 months, I have become acquainted with approximately 400 different companies and I can say that 75% of them had good ideas, and more than 50% was potentially a huge market to enter. But my assessment is this: only 20% of the people who establish these companies have the capabilities necessary to implement the project.

These are not random street companies. I'm talking about the teams that I see at Demo Day events of most business incubators, and those organizations that have already managed to collect considerable initial investments, or already “approved” startups that have been validated (at least, taking into account the definition of this term for today) .

The shortage of talented people is formed into a kind of black hole, into which I will not allow myself to be tightened. Under the word "ability" I do not mean the presence of a "correct resume." I am talking about much more fundamental things, for example, that “they have no idea how to sell this product” or “they don’t even have a clue about the business they are engaged in.” Brad Feld (Brad Feld) very accurately all noticed and described here . Like him, every day I had the opportunity to meet with inexperienced children who are completely entangled in all aspects of business management.

It seems to me that this problem is based on two reasons:

1. Poor education. Poor understanding of the theory of development of a full-fledged company. At the same time, there is a wealth of information on how to come up with ideas and test them (for example, The Lean Start-up ). Also good is the education system of business schools under the MBA program, where they are taught to manage the company as soon as it has created a product that has been validated for the relevant market.

The problem is that insufficiently effective information about how to move from a tested idea to a growing company, what to do and how to do it. In fact, our informal education system, figuratively speaking, will fairly well describe how to go from 0 to 1, and the official education system will teach how to count from 10 to 1000, but about the path from 1 to 10 (which differs significantly from the other two, mentioned above) very little information.

Note: At the same time, I find First Round Capital project one of the few places where you can find wonderful unique and informative content in the field of venture investment.

2. Young = bad. Most of the founders are young, and young people are inexperienced, which can be good for many reasons (energy, enthusiasm, ability to adapt, lack of arrogance), but this automatically makes them senseless in business.

I was extremely stupid in my youth, so I say this based on my own experience. If you do not have a foundation in the form of experience, which you can turn to if necessary, you will not be able to understand and solve the hundreds of problems that come with the foundation of the company. The younger you are, the less experience you have and the harder it is to cope with business management.

This does not mean that young people can not be outstanding entrepreneurs. Yes, of course, some young people can and build companies and become terrific leaders. Please do not cite the story of Mark Zuckerberg and Evan Speigel as counter arguments to me. They are by definition exceptions that prove the rule. Each of them has 50 founders who have undermined their once-cool companies, making all the typical mistakes of youth. Ask any venture investor about this, and he will tell you many more stories. They are much more bad than good.

I know this firsthand - I have had enough time to see during my investing activities. Two portfolio companies come to mind, each of which received several rounds of investment from large venture capital funds, where I have to really restrain myself in order not to go to the arrogant, stubborn faces of their founders.
Virtually every decision of them is wrong, and the worst - I can say exactly from what considerations they make these wrong decisions, and make an effort to explain exactly what their arguments are wrong, what might happen, and point the right way.



Do they listen to me (or their other investors)? Not. The two founders did what Mark Zuckerberg said about Twitter: “They drove into a gold mine in a crowded car.” They are young, arrogant and inexperienced. Their small success hit them in the head, and they think they know everything. I am watching how two delightful ideas, which were to grow into a magnificent business, are being destroyed by the inexperience and arrogance of their young founders. And it pisses me off.
Both are young men, and young men are particularly prone to similar behavior. I prefer to invest not in the business of young men, but in companies founded by young women or older people (no matter what sex). My experience has shown that these leaders listen to people, do not believe that they know everything in the world and make wise decisions based on good principles, and not on impulses that are caused by bouts of pride.

Research confirms the wisdom of such a preference: women and experienced entrepreneurs better cope with the creation of companies than young men, and the best venture capital investors agree with this.

Let me return to my initial thought: considerable funds are allocated for maintaining a huge number of remarkable ideas, but very few founders of companies that are able to effectively manage their business.

So why is this so important? Why did I stop investing in angel investing because of this? Because those events that happened in 2000 and 2008 are inevitable. And it will not be pleasant.

As soon as that wave returns, it will put all these companies to the bottom. Not because their ideas or business are bad, but because the founders have no idea how to manage a company. As Ben Horowitz said, only in times of difficulty, not abundance, can one see who is really a good leader.

2. Angel investing is the irrational use of my time.

And if angel investing seems to be an easy, simple and enjoyable activity, then you should not be mistaken. If you do not want to lose your last shirt, then you will spend a lot of time searching for projects, thoroughly checking the companies you invest in, and after you have invested money in them, you will also work with them until you drop so that they become successful.

I will give one example. I invested in the company PrideBites, which is engaged in the creation of personalized items for dogs (toys, clothes, blankets, etc.). And I spent at least 500 hours of my time, for two years studying the niche of toys for dogs, shops selling similar products, the nuances of Chinese production and logistics (so now I can give them advice with great knowledge). Not to mention the other 500+ hours that I spent with the team, helping them cope with hundreds of problems (Yes, they are young men, and yes, they are inexperienced and bad, but the main thing is that they listen and accept direct instructions well. And quickly change for the better, and the company succeeds due to their personal growth and the fact that they have learned a lot).

This is practically a full-time job and this is just ONE company.

I earned on angel investing. Not so much. And I had a ton of benefits that you might not have. And I confidently leave this niche, because I know that so many successes were pure luck. Can I spend my time helping the leaders of all the companies I invest in develop? Yes. And if you skillfully select your founders, giving preference to experienced entrepreneurs, and spend a lot of time with them, perhaps this would solve all the problems?

Yes, it would. This is a very good point, and you are right in calling me to it. Actually, this is what a good angel and MUST do.

But also for this reason I decided to stop my angel investing. To really succeed, you need to devote a lot of time to it. Here is one of the most important principles of accumulating wealth (and creating a lifestyle) that most people ignore:

You must spend the lion's share of your time as productively as possible (at the limit of its effectiveness), and entrust the implementation of the rest to others.

Do you remember, above in this article I wrote that there are a huge number of great ideas for creating companies, but very few people who can bring them to life? I am one of those who can, who are able to conduct a company from 1 to 10 (at least with respect to some ideas). So I had to choose what would be the best use of my time: angel investing or developing one of these great ideas in the company.

And this was not the question that I managed to think about at my leisure. In fact, I was forced to make this decision quickly and under stress.

In 2014, I was in the hands of a new business. Quite by chance I found a way to turn the writing of books and their publication into a service, thanks to which you could really effectively transfer the knowledge and wisdom of professionals into a great book (in just 12 hours). The company gained momentum before we were ready for this: for the first two months, the profit was 200 thousand dollars even without any marketing. And I began to cancel meetings with companies I invested in, worked until late at night, and my time spent with my family always suffered (the time I try to protect from the influence of work).

I had to make serious decisions about what I was willing to spend my time on, because I was not enough for these two worlds.

I did two things:

1. I calculated the expected benefits that each of the options would bring me, that is, how much I could earn.
2. I thought about which option is most important for me, if we drop the material component.

I will not go into the details of the expected benefits (there are excellent explanations on Wikipedia), but in essence it is the assignment of a certain monetary value to different solutions, which makes it possible to guess how much I can earn by choosing one of the two presented roads. Simple calculations have shown that the expected benefit from a startup was higher (but not by much). But this was not the deciding factor. I have good money - more than enough to not make decisions that are based solely on money. For me, the decisive factor was the answer to the question:
“Why am I doing this? What really matters to me? ”

For me it has always been important to work on what I like and gives life to something new and useful for the world. Whether it is the creation of an entertaining literature, a publishing house, or a new way of writing a book - I was always motivated by the desire to create something out of nothing, so that it would solve a real problem and have real value.

This is not what angel investors do. They help other people create something from nothing.

Both options have value, but the second one personally does not cause me a huge motivation. I’m sure that the time will come when I’m tired and just want to use my wealth and wisdom to help the new generation build their business for the future. But I'm still young, and my most productive entrepreneurial years are still ahead. And if I'm not going to spend them on solving complex and interesting problems, then what can I do? Why invest your money? To get rich on the labor of others, complaining that there are not enough talents to solve complex issues? That would be serious hypocrisy.

In addition, during my investing activities, I discovered in myself some features that made me think about it.



The fact that Shark Tank has the highest rating among TV shows has a reason: people like to feel governors when they have the opportunity to criticize someone who has addressed them. This is similar to the modern version of the serfs, who appeal to their master. This is an exciting performance, and I will tell you that it is much more interesting if they turn to you for mercy.

Few people want to admit that this is part of this kind of investment, but this is true, so I will say:

Perhaps you feel the most exciting feelings in angel investing when people flatter you and beg you to invest their capital in them. Because of this, you begin to feel influential and respected.

Anyone who says that this is not the attracting side of angel investing is cunning. It attracted me (at least in the beginning). I would say that, as I later found out, this is the motivation for most novice angel investors. They like this feeling. But the problem is that these sensations are cheap. In fact, you are not doing anything important - the entrepreneur performs an important job, not an investor.

Self-worth is deceptive. And although in the beginning you may be intoxicated by them, but soon comes the understanding of what it really is empty and unreal. I just wanted to do important work, and not feel satisfied that someone else was working.

This is a fundamental question that everyone should ask themselves: do you want to be in the arena or do you have enough tribunes? Both have their own value, but personally I prefer to be in the arena, risking and fighting for a place in the sun. I can not only be a spectator. As soon as I understood this, my decision to leave angel investing became clear. This is such an important lesson, and so few people understand it. So, please understand, if you have not yet understood: the only thing that cannot be replenished is time. Deciding how you are going to spend it, you make the most important decision in your life.

To be continued…