How does Angel Investing?

“You either die a hero, or live long enough to see yourself become a venture capitalist.”
— Unofficial motto of Party Tent, the famous two-faced venture-backed startup that imploded one dark night when their lead designer got busted for not paying the font licensing fees for Gotham

Making the jump from software to investing

I started making the transition from software into angel investing a couple years ago. A few things immediately became apparent:

• I don’t know what I’m doing
• I wish I had paid more attention (and had more access) to financial discussions at previous startups I worked at
• And oh neat: this is pretty exciting

It’s been a couple years now, and I’ve learned a lot. And since I’ve recently seen so many developers start showing an interest in making a similar leap… I thought I’d share some thoughts on making that transition.

Don’t worry about a possible impending global financial crash or the fact that valuations are totally bonkers because of all the other new investors jumping into the mix: you’re an investor now, dammit, and metrics and forecasting don’t need to be your priority anymore. (Kidding. Probably.)

The cold start

I think it’s understandable that most people who have worked for startups in the past have no idea how the whole industry really works. They might be able to build an amazing, scalable backend perfectly written in eight different programming languages (except JavaScript), but when it comes to raising money, when it comes to stock treatment and valuation differences, when it comes to analyzing a new company — which might still be just a single person and a napkin sketch! — it’s just not their wheelhouse.

Part of that is a failure of previous work experiences: as an industry, we don’t do a really great job at teaching these things, or even worse, we hide them behind the “that is confidential information!” justification. At the first startup I worked at, our CEO walked us all through our books line-by-line and described how the business worked, saying “if a company hides this from you, treat it as a red flag”. I think about that a lot.

So the trick is to cram all that information you had missed out on and get yourself up to speed quickly. One straightforward way to start is to — unsurprisingly — read. There’s a lot of great information out there: I’m a fan of Holloway’s guide to angel investing, which is a deep-dive into angel investing in particular. But don’t forget that there are always two sides to every angel investment transaction: yours and the founder’s. So I also think it’s super helpful to read up on “how to raise” resources, too. Brad Feld and Jason Mendelson’s Venture Deals is kind of the gold standard. That’s actually what I first read before starting to raise money for During a few years back. There’s a ton of overlap between raising money and investing in companies, and if you’re looking to do one of them, I highly suggest doing the other, too. You learn so much about investing from trying to raise money. And you learn so much about raising money by investing.

Investing without money

One of the first things I hear from others who are interested in becoming an angel is “what’s the minimum check size to get started”? And, naturally, that’s an important question to ask, especially because people are all sorts of gradients between “I don’t have any extra money for this” and “I own Amazon”.

The minimum check size is zero.

The thing I hate most about investing is that the iteration cycle is so expensive. Both in terms of money — it’s your money, and you ostensibly don’t want to piss it away — and it’s especially expensive in terms of time. Think you found a breakout company? Cool, now just wait 5-10 years before you can get a full result. Makes you pine for software, where you can make a mistake, discover it when you deploy it three minutes later, push a fix, and redeploy, all within ten minutes. The investing iteration cycle sucks. And if you’re just getting started, it can be really expensive before you even start becoming competent.

Something I tried to leverage before taking investing seriously is to do it without money at first. There are a few ways to do that:

• Advising. I advised companies for years before investing in a single startup. I had similar goals going in: I had some domain knowledge that could be helpful for founders, and I wanted more chips on the table to increase chances of making money on startups. (Being involved in more companies leads to better returns than being involved in good companies alone.) Being a startup advisor is a good way to gain insight into the executive-level decisions you may not have had much exposure to in the past, and it also helps you expand your mindset into more companies than just the one you’re working full-time on. It also prepares you as a future angel investor to help figure out how to be an asset to a company when you’re not dealing with them on a daily basis. That’s one of the trickier things of being an angel, I think; you have to be clear where you can help at the drop of a hat, and be clear to the founder when you’re out of your depth. Being an advisor to a company comes with it a slew of other considerations; might have to write more about that in the future (let me know if you’re interested!)
• Syndicates. Angel syndicates have been around for decades, but recently they’ve become far easier to get into as a newbie. AngelList Syndicates is the most well-known these days, and it does make it easy to get started if you’re an accredited investor. One of the best things you can do is to join one (or preferably many) syndicates. You’ll get deals in your inbox every couple days and you can use that to use a critical eye and ask yourself, “well, would I actually invest in this, or not?” Most syndicates have a minimum investment amount — usually $1,000 or $5,000 — but the real minimum is zero: you can just decide not to invest in the deal. More deal flow (especially if you don’t have a ton of connections yet) means you can iterate far quicker on “is this startup a good investment”? It’s helpful for future founders, too, since the more pitches you see, the better off you’ll be in making your own pitch. Really can’t stress how helpful this was for me: I spent a few months basically just monitoring deals, making mental notes as to how I analyze a pitch, and then I slowly started making small investments here and there until I became more comfortable. Certain syndicates are even more helpful with this, too: I’m currently setting up a syndicate for former GitHub employees with an emphasis of being a gentle start to gain an understanding (and exposure) to the process. Take a look if a previous employer you worked at had an alumni investment group. Your university might have one as well.
• Crowdfunding. This is really enabled by very recent changes in US law allowing different treatment of crowdfunded investment rounds. Republic seems to be one of the early winners of this kind of approach: they host crowdfunded raises for vetted companies that you can invest in, some for as low as $100. But you can also browse through their existing public pitches and help your iteration cycle, too. (Take a look at Gumroad’s $5M raise, for example.) Again, the name of the game is getting your eyes on as many deals as possible so you can learn and evolve your own instinct for your own later investments.

Another option, if you’re feeling lonely, is to just add the phrase “angel investor” to your Twitter profile. You’ll start getting lots of randos sending you weird pitches. It’s… uh, not necessarily a recommended approach.

How can I be helpful?

One of the common jokes is that every investor will inevitably end an email with the phrase “How can I be helpful?” It comes from a good place, of course — sure, everyone wants to be helpful — but just expressing the desire to be helpful isn’t really… well, helpful.

Before really jumping into investing, it’s worthwhile to really ask yourself how you’re actually planning on being helpful. Otherwise… why are you even doing this? Just throw a bunch of call options on $GME or some shit instead. Part of the benefit of angel investing is using your background to hopefully improve your return on investment.

There are a lot of ways to be helpful, but I’ve found for early-stage startups that are three main areas where help is always sorely needed:

• Hiring. Hiring hiring hiring. Hiring is always the problem. Most startups you invest in probably have at least some network they can fish for leads, but the first 10-20 hires are critically important, and they can be tricky to find. This is where generalists get their time to shine, and attracting these types of people (or even just discovering them) can be difficult. Being able to mine your own network for possible hires, or simply being available to talk to the founder about candidates, is really helpful. One of the startups I’ve invested in does a good job of letting targeted hires talk directly to an existing investor, and that’s been really valuable to landing hires that otherwise might head elsewhere. You want to be that kind of person who can help out in this sapce.
• Customers. After hiring, I think helping with customers (depending on the business) is the second most important thing for an early startup. You’ll start getting your monthly investor updates from your portfolio company, and more often than not they’ll reach out for leads into companies of x size in y industry. It’s good to be able to make those introductions to potential customers. Revenue, as you might imagine, turns out to be a good thing.
• Domain knowledge. This one really depends on the circumstances, but sometimes there’s just a great fit between you and your portfolio company. Maybe you’ve worked on something similar in the past, or are a huge user of the product they’re building. Or, maybe the company is really struggling with marketing, and that’s something you love digging into. This area can change a lot as a company grows, so it’s worth thinking prior to putting in a check about what’s special about you now and what’s special about you a few years down the line, when things are different. And yes, I think you’re special; don’t be so hard on yourself.

You and them

There’s a lot more to dig into; if you’ve never done this before, virtually everything is a learning process. I’m still learning what feels like new things every day. But it’s really been fun, especially if you have some experience in the industry and you find yourself getting burned out on the software side of things. Just talking to other companies, seeing different approaches and mentalities of how they attack problems… it can be pretty eye-opening. And a lot of the time the advice you give as an investor or advisor doesn’t even have to be perfect advice. Sometimes it’s just helpful to say “whoa, don’t do that, because I did that early on at this other startup and it was a fucking terrible decision, and here’s why”.

The only other aspect that ties into all of this is to keep remembering what you’re doing here. For these companies you’re a source of capital. And that’s great- that’s how big things can come from humble starts. Hopefully you’re a source of reassurance, wisdom, and encouragement, too. But you’re not changing the world; the founders and their team are. You’re not some sort of ridiculous genius savant for picking winners; you might just be competent at wiring money back and forth. It’s worth pointing that out because the power dynamics here are totally fucked up. People come to you for money, and you get to make the ultimate decision: yes or no. Easy to get wrapped up in that… but try not to.

Try to help people, try to make good decisions, and hopefully things work out for everyone.