Why I stopped angel investing (and why you should never start). Part 2

Everything that was described in the first part of the article refers to my personal reasons for leaving the angel investing. They may be valid for you or vice versa. In any case, you should NOT be engaged in angel investing. That's why:

1. Angel investing economy works against all but a handful of favorites
2. The angel investing structure works against all but a handful of favorites.

1. The economy of angelic investing works against all but a handful of the elect

If you do not understand this phrase, then you should NEVER deposit MONEY in STARTUP, if it is not only money that you agree to burn or throw out of the window, because this is exactly what you are doing when investing it in a young company.

Peter Thiel gives a long explanation of the exponential law (or the Pareto distribution ), but Sam Altman makes it easier and faster:

“Everyone says they understand the exponential law in angel investing, but only some people use it. I think the reason for this is the difficulty in representing the difference between 3x income and 300x (or 3000x). Often you will earn more money by investing in one best project than from all others taken together. The consequence of this is that the real risk of this investment is not paid attention ”.

He continues explaining the details:

“Do not try to find good deals involving potentially profitable companies, in the hope that their value will increase to 20-30 million, and you will then be able to resell the shares at a higher price. Do not do this, because too many things can go awry. And if you look at people who were really successful angel investors, you will see that they relied on the founders and ideas, which they believed had great potential, and then often readily lost their money. ”

This means two very specific things. The only way to be a truly successful investor is:
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1. Invest in a ton of startups, coolly watch how most of them burn out.

and

2. Have enough money for both the initial investment and the subsequent major investment rounds (at least, if we are talking about proportional financing).

It seems clear to you, but most likely you are mistaken. Paul Graham explains :

“In startups, the degree of success of the big winners is estimated by how much the price fluctuation surpassed the initial expectations. I do not know, these expectations are subconscious or based on knowledge, but, in any case, we are simply not ready for a thousand-fold increase in investment in a startup. ”

The Y Combinator project understands this well, so they developed their program in such a way as to search for potentially top-notch companies and clearly select them, not based on a high probability of success at the lower level, but on who has the potential to become one of their mega companies. winners. This means that they reduce the percentage of all their success for the sake of increasing the percentage of those projects from which investors receive large profits in a short time.



Okay, let's say that you really understand the exponential law, and you have a ton of money, so you would like to invest a five-digit amount in 100 companies to surely get on the project that will repeat the success of Uber and provide you with a large profit. Well, congratulations - this is only the initial bet with which you enter the game . You still have to meet the main problem.

2. The angel investing structure works against all but a handful of favorites.

The problem is that during the year, at best, only a few projects are being formed that bring really large profits to investors. Do you think you can predict exactly which projects out of thousands of start-ups being launched each year will be truly successful?

Many people think so. Almost everyone is wrong.

But the most confusing part of business angel investing is that even if you carefully chose the winners and have some certainty of success, you may still be defeated.

Why? Probably because you just can not get into the ranks of the winners.

This is due to the fact that the best companies come to light in the early stages (at least in Silicon Valley) and, as a result, many people want to invest in them. And even in order to be able to lay out your money, you must have access to projects, which means only one thing:

Almost always you need to have social connections that will help you to invest in companies at very early stages.

In order for you to have an extremely clear idea of ​​this, I will only say that I got all my great deals thanks to my connections. . Just because. And for no other reason. This (mostly) can be said about all other investors. You win because of your connections.

And this means that only people of a certain type can be truly successful in business angel investing. Here are some examples of those types of people who consistently make a profit (and large profit) from angel investing:

• Paige Craig (Paige Craig)
• Chris Sacca
• Elizabeth Kraus
• Kevin Colleran
• Shervin Pishevar
• Gary Vaynerchuk (Gary Vaynerchuk)
• Scott and Cyan Bannister (Scott & Cyan Bannister)

What distinguishes them from all the others?

1. They have an impeccable reputation (created over 10 years or even more) of great people who have worked hard for those companies in which they have invested.
2. They have an amazing network of strong connections in relevant areas related to startups, which was created by providing thousands of services to other people (or through acquaintances with former founders or employees of high-tech companies).
3. They have so much money that they can double and triple their contributions to selected companies and then wait 10 years for them to profit.
4. And one more key thing that I did not take into account: they are influential persons in society and therefore may not be afraid that venture investors will torment them and literally get out of the investment. Yes, imagine that even the big players have to worry about it.

Do you have it all? Consider that your competitors already have it all in stock.



Seriously, read at least this post about what Chris Sachcha is doing for his companies. Or read about all the things that Paige Craig did just to get into the very first round of investing AirBnb. Paige does this for dozens of companies, which is why he is a very popular angel who is wanted by the best companies. (To complete the story, I should add that I know Paige quite well. He helped me so many times, I could easily write him a letter with declarations of love).

You may not be able to do all that these investors. If you could contend with them, then perhaps you are right, and angel investing is for you. But think about the fact that thousands of people read the same thing as you, and now they are taking special training courses on the features of investing.

You are not alone in your aspirations, and you are left far behind. It is becoming increasingly difficult to build the necessary network of connections and gain the necessary knowledge, and more and more capital is pursuing a thinning handful of capable entrepreneurs.
To be honest, since we have already started talking about fashion trends in the modern world (see the first part of the translation - translator’s note), it seems to me that the real boom should be looked for in a growing number of investors.

I bet you saw the post that was published by AirBnb CEO Brian Chesky some time ago. In it, he unveiled seven letters of refusals, which he received, collecting the first investment for the project. Several people sent me this link with the words "Eh, I should have known that this company would take off, it was worth investing money in them." Maybe.

But you do not know the whole story: these letters were sent only to a handful of people who were already reputable angels / venture investors. They were not sent to a wide range of people. The best companies never do this. And if you cannot be the type of person to whom Brian Chesky would send a letter, then perhaps you should not be an angel investor.

That is why I advise you not to engage in angel investing. Its whole structure and economy does not work for investors. Only those people who, like Liam Neeson in the Hostage, have a “unique skill set” and make investing their main priority on which they are focused, benefit.

If you do decide to invest, how to do it right?

The best way to invest in startups is to become a “limited partner” (LP) in a venture fund managed by someone who can do it. You pay 2% commission and 20% of revenue. And for this you buy all these skills and connections. And that’s what I’m doing right now (probably the funds I’ve invested in will bring me the most profit)

But it is also dangerous. Why? Because most venture funds lose money .

You need to know those with whom you invest, and then hope that you have chosen a good fund. And in order to do this, you need connections, thanks to which you can get into the best funds, because they can choose their “limited partners” ... and now you come back to the same problem with connections, which I have already mentioned above.

Is there another way to invest in startups that avoids most of these problems?

At the moment, I see only one way for an ordinary mortal to get reliable and (relatively) safe access to high-level investment transactions:

Use AngelList syndicates .

It is the safest and most trustworthy way for a short time, allowing investors to get serious deals without connections. AngelList does an amazing job in angel investing, nor does it get the publicity it deserves. This project has a huge potential that can change for the better the world of investing in startups.

Most of the business angels I mentioned above use syndicates. More names can be found here . Tim Ferriss and Naval Ravikant also represent good syndicates that are worth joining. No, no, I’ll get nothing if you join their projects. And yes - I also have a syndicate, and I did not give him a link, because I never used it, and I do not advise you to join it.



If you want to invest in angel investing, then most likely this will be the best option for you. But you should CAREFULLY read about it before investing money. There is a real risk here.

What about crowdfunding with the distribution of the share capital?

I used to think that this kind of crowdfunding is great. I was an ardent supporter of this. And I still think it will be great ... someday.

But at the moment I think this is a bad idea and I recommend that the majority avoid this type of fundraising.

There are many reasons for this. I could tell you a story about how they threw me on what should have been a terrific investment sale, because the platform could not properly establish an adequate liquidity preference.

But it seems to me that this “storm of tweets” (and history ) by Jason Calacanis can serve as an excellent summary of the reasons why the effective implementation of crowdfunding with the distribution of the share capital share is now very problematic:



What he describes is a typical Pump & Dump scheme of stock exchange fraud ( according to which insiders are promoting a certain share, spreading false rumors in the hope of making a quick profit - translator’s comment ), and in the near future we will see a huge number of scammers and deceived people in the scope of this kind of crowdfunding.

The sad truth is that people ALREADY fall for hooked fraudsters in crowdfunding with the distribution of the share capital, and they do not even realize it. And you do not hear about it, because no one is interested to reveal the whole truth.

Why?

Because everyone makes money - everything except small investors who use crowdfunding platforms.

Personally, I would currently bypass the tenth expensive ALL models using a similar reward scheme. Let others risk, lose, hysterically, and eventually the balance of the system will be found. Someday crowdfunding with the distribution of a share capital share will be wonderful and worth the investment. But not now.

Conclusion : In order to make money, do not engage in angel investing, but instead build your companies.

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.

If you want to invest in startups, then choose syndicates from AngelList.

If you seriously want to become a business angel, then be prepared to work hard, doing your best at 100%, and devote all your time to this, otherwise you doom yourself to failure.

For most people, it would be better to spend your time and money learning new skills and creating your own company. Better yet, join a great company at an early stage of development and help them on their journey to the cruel world of business: it’s safer and still gives you the opportunity to earn a ton of money.

The best opportunities for most people are creating, not investing. Kevin Kelly (Kevin Kelly) very well described this, saying that we are at the dawn of incredible changes, and most of the best ideas will still be invented.

Find your idea and bring it to life, as I do.

About the author: Tucker Max, CEO of Book In A Box and the most successful author of the New York Times.