18 Nov 2022

What I've Learned About Angel Investing

I recently started angel investing and have now invested in seven startups. I’m treating it as an experiment, and I don’t have any results yet. Even so, I’ve learned a ton from making these first investments, and want to refine what I’ve found before making more.

At YC’s Investor School, Ron Conway prefaced his advice to aspiring angels with: “Teach yourself”. I now understand why. All the advice at Investor School was super helpful, but there’s no teacher quite like experience.

So, here’s what I’ve taught myself about angel investing… So far.

It’s Fun

The most important thing I’ve learned about angel investing is that I find it to be super fun.

Before I got started, I wasn’t sure if I would. I’d loved doing my own startups, but would I enjoy investing in somebody else’s? There was really only one way to find out, so I just made a few investments. Happily, I had a blast doing those first ones, so I kept going with it.

It’s exhilarating to meet energetic and optimistic founders who have the kernel of an idea and the conviction to try it. And it’s gratifying to be able to help them in some small way. There’s this special feeling in the air when these ingredients come together. It’s just pure potential.

If I didn’t find angel investing to be fun, I would have stopped. It’s hard to get really good at something I don’t like doing. And with angel investing in particular, if I was only doing it to make money, I think I’d make worse decisions. It’d push me towards worrying about the wrong things, like valuations and what other investors think. Since I’m just having fun, I gravitate to the right things, like the founders, their product, and their customers. Just like the way to start a great startup is counterintuitively not trying to start a startup, I wonder if the way to make great angel investments is to not worry too much about making money…

At the very least, if my main motivation was making money, I’d be disappointed if all my investments went to zero. Whereas I’m currently having so much fun with each that it’ll just be bonus points if I see a return on any of them. But I really think I will. The founders I’ve invested in are all really good!

Founder Over Idea

The founders matter the most, so I’ve made each of my investments because of them more than their idea. 1 But they’re still pitching me on their idea, so I had to figure out how to evaluate it. After a few pitch calls, I found a trick: just assess the idea for what it tells me about the founders.

Why are they working on their idea? It needs to be to solve a problem they have deep conviction in. One founder that I invested in saw his Dad’s long standing restaurant suddenly go out of business during the last recession. That got him thinking about software to help restaurant owners improve their bottom line. That’s conviction. Whereas another founder I met with was trying to build a better version of X, but didn’t have a compelling case for why the current X isn’t good enough. Something, something, “ours is going to be better”. I didn’t invest. It felt like a solution in search of a problem.

Are they obsessed with their idea? The founders I’ve invested in think about their idea all the time. They know their problem domain inside out. They’ve tried all the existing solutions, and not just out of due diligence; they really want something that solves their problem! But they’ve come up empty, so they’re building their own. This also means they are their own first users (or close proxies), and that they know where to get more.

And are they also flexible with their idea? Will they experiment their way from the initial idea – which rarely works – to something that does? I try to discern this by tossing out a bunch of related ideas to see how the founders respond. The ones I’ve liked are open to considering any of them and quickly cook up ways to test the promising ones out. Whereas founders I’ve decided not to invest in let the ideas just kind of pass them by. Being flexible doesn’t mean being easily swayed though. The best founders always seem certain of what to try next.

I do still weigh the idea itself. Can I imagine it growing into a billion dollar company? If I can’t imagine some way, I’ll pass. And I also need to be just plain excited about the idea. It’s hard to do a good job helping the founders I invest in if I don’t care about what they’re working on.

How do I assess the founders themselves? One trick I’ve found is to ask myself if I’d want to work on a side project with them. This reduces the question of deciding who I should invest in to the much more familiar one of deciding who I should work with. I’ve had a lot of practice answering that over the years, so it lets my subconscious serve up the answer. Thinking in terms of a side project calls for the right attributes in the founder and ensures I’m exacting enough without being too exacting. “Would I cofound a startup with them?” would be too exacting. There’s just no way to know that after a thirty minute call. Whereas that’s plenty of time to determine if it’d be fun to work on a side project together.

One nice property from all this is that investing in the best startups means investing in the best founders. And investing in the best founders requires meeting the best people, which is something I already want to be doing anyways.

How To Be Decisive

For each of my investments, I’ve taken one meeting and then decided within a few days. 2

At first I did this for the founders’ benefit, but I’ve found it’s my preference too. Agonizing over a deal is stressful and unproductive. To avoid getting stuck in limbo, I aggressively address my remaining concerns after the pitch call. I accept that there will be some I can’t resolve. And then I just make my best guess. It’s helped me to write out the concerns I have, and why I’m investing despite them. If I’ve decided not to invest, I write all the reasons I might regret the decision. Formalizing this brings me closure. It lays plain how I’m making difficult decisions on imperfect information, and that there isn’t a right answer.

I’ve discovered there’s also a nice reward for deciding quickly: everyone feels great! It conveys to the founders that I believe in them and am eager to get to work. And it’s a helpful test for me. If I can’t decide quickly, I probably don’t feel this way, and so I probably shouldn’t invest.

It’s helped me to decide on all the knowns prior to the pitch call, like how much I’d invest and what my key concerns are.This frees me to focus on the unknowns that come up during the call. I try to learn as many new things during the call as I can instead of just validating what I already think. This generates more data points for me to work with when I later decide.

It’s helped to stay focused on the founders. I can’t overthink that after the pitch call in the same way I can overthink an idea. And I’ve already established that the founders are more important than the idea anyways.

And it’s also helped to lower the stakes by writing smaller checks. I thought this might make founders less inclined to talk to me, but it hasn’t. Especially after I show that I’m easy to work with and will provide concrete help in addition to money.

How To Help

I like helping before even starting to talk about investing. It provides an organic way to explore things and ensures I’ve earned the founders’ time.

I can start by getting them some users. I can always get at least one… Me! Trying out the product is fun, and also helps me decide if I should invest. Is it any good? Does it improve each week? How attentive are the founders to me, their humble user? 3 In the process, I come up with useful feedback that I can share with them. Win win.

Sometimes I can introduce the founders to other potential customers. If they convert, I’m way more inclined to invest.

After I’ve invested, I try to bring a few more good angels into the round. It’s a lot of leg work — checking if the angel is interested, ensuring the founders are interested, and crafting the intro — but it’s worth it. It’s rewarding to connect good founders with good angels. And I like getting to work with my angel friends in this ad hoc way. Win win win.

I enjoy providing ongoing advice and mentorship most of all. I’ve found this works best if I meet with the founders on a regular basis. 4 Since every startup is unique, it helps to have the company’s context and history in order to give good advice. So far, the topics that come up the most are getting users and figuring out hiring.

I’ve learned not to speculate. Bad advice is worse than no advice. If I don’t have direct personal experience with something, I just say that. At first I felt bad about this, but I’ve noticed the founders don’t mind. They just go ask some of their other angels. But I do make a note to go learn whatever it is firsthand, so that the next time it comes up I have useful experience to draw upon.

Sometimes the most valuable help is offering moral support. Real moral support is giving the founders energy and promising directions to channel it. It’s helping them identify their most pressing problem and possible ways to solve it. It’s giving them feedback on their work, especially until they have users to do that for them.

I benefited immensely from this kind of support when I was doing my own startup. Things could get really demoralizing when I wasn’t sure if it was going to work, and it was helpful to share my burden with mentors who really understood my company but sat outside its emotional gravity well.

I’m extremely grateful to the few angels who took a keen interest in providing that to me, and am glad to be finally paying this back to other founders now.

Leaps Of Faith

My first investments were in close friends that I have a long history of working with. Those were no brainers. I’d invest in them again and again. But when I wanted to make more investments, I had to branch out and invest in people I’d just met. The first time I did that felt extremely weird, but I got used to it surprisingly quickly. Formalizing the qualities I look for in founders helped, as did officially committing to experimenting with angel investing. At that point, investing in new connections just came with the territory.

There’s also this question of making money… It’s required a leap of faith to invest in startups raising on such high caps. They’ll have to become unicorns in order for me to see a meaningful return on the investment. And it’s required an even bigger leap of faith to keep making investments before I have any results back. That will likely be years from now, when the startups I’ve invested in have successful exits or die. And while I will get some partial results along the way, like if they gain traction and raise subsequent rounds, I don’t even have that data yet. But this seems like the kind of thing that doesn’t work until it does, and like the way to succeed is to just keep going. 5

I’ve been surprised by how random it all feels. Super angels and top VC firms get to see every deal, but I don’t. So it’s all a bit haphazard as I invest in people I happen to meet and decide I like. I’m hopeful that over time, as I work with more founders and other angels, I’ll get a feedback loop going and things will feel more comprehensive.

But it’s always going to be at least somewhat random because it’s impossible to predict the future of technology. There’s no way to know if a startup will work. And the founders I invest in may end up working on completely different things anyways.

In most of my other work, I’m accustomed to arriving at a correct answer through rigorous effort. Angel investing just isn’t like that. I’ve learned to just accept this, make the best investments I can, and trust that it will all work out.

Always Be Closing Coding

The last thing I’ve learned about angel investing is that, as fun as it is, I don’t want to spend all my time doing it. If I did, I wouldn’t have time to make things, like this essay or cool computer programs. That’d be sad. There’s a satisfaction in making good things.

It’s not just for the art though. I think writing and hacking will improve my investing. It will lead me to interesting technology and the people working on it. And it will keep me empathetic to them through frequent reminders of how hard it is to bring something new into the world.

Making things maintains balance. If I was angel investing full time, I’d find myself always seeking “opportunities”, essentially looking at the world through the lens of a salesperson. That sounds terrible. All the magic would go out.

I’d rather be first and foremost a maker, curious and always learning. And whenever that brings me abreast of founders I can help, through angel investing or otherwise, I will.

So as I ramp up my angel investing, I’ll keep working on projects in parallel, and let one reinforce the other. Who knows where it will take me.

  1. I would decide based on traction (growth rate of revenue or active users) if I could, but most of the companies I’ve considered are too early to have any. 

  2. I’ve sometimes decided the same day, and I’ve decided two of them on the spot. Those may prove to be my best investments yet, but I’ve since made a rule for myself that I have to sleep on it just to be sure. But rules are made to be broken. 

  3. One founder emailed me a personalized warm welcome onto their product within minutes of my signing up. That’s attentive! I invested. 

  4. The frequency is up to them and tends to change over time. 

  5. Or maybe this will just accelerate the car off the cliff…