Thread
I’ve invested a few million over the last 5 years into 50+ startups.
I've had some wins but made a LOT of mistakes.
Of all the things not to do - there's one mistake that stands out above the others.
In this thread I’ll break down what that mistake is and how you can avoid it:
I've had some wins but made a LOT of mistakes.
Of all the things not to do - there's one mistake that stands out above the others.
In this thread I’ll break down what that mistake is and how you can avoid it:
Here’s a pretty common situation:
- You take a pitch
- You like what you hear but you’re 50-50
- At the end, you ask “Who else is investing?”
- The Founder says some big name firms
Wow you think! This pushes you over the edge.
I should definitely invest if all those guys did.
- You take a pitch
- You like what you hear but you’re 50-50
- At the end, you ask “Who else is investing?”
- The Founder says some big name firms
Wow you think! This pushes you over the edge.
I should definitely invest if all those guys did.
This is what I like to call the "Proxy Diligence Problem".
And it breaks down every time in 2 main ways:
1. Input Chronology
2. Playing Different Games
Let's dig into both.
And it breaks down every time in 2 main ways:
1. Input Chronology
2. Playing Different Games
Let's dig into both.
First Input Chronology.
The idea here is simple - each successive person lowers their guard.
- Firm A decides to invest
- Firm B hears Firm A is investing
- Angel C hearss Firm A/B are investing
By the time you see the deal, you think wow...
A + B + C are all involved.
The idea here is simple - each successive person lowers their guard.
- Firm A decides to invest
- Firm B hears Firm A is investing
- Angel C hearss Firm A/B are investing
By the time you see the deal, you think wow...
A + B + C are all involved.
Maybe A + B + C all made independent decisions.
But more often than not, they didn’t.
They made compounding decisions.
- B was influenced by A
- C was influenced by A + B
Each successive decision was a worse decision because it had less and less to do with the company.
But more often than not, they didn’t.
They made compounding decisions.
- B was influenced by A
- C was influenced by A + B
Each successive decision was a worse decision because it had less and less to do with the company.
This still works out sometimes.
The problem is when it bleeds into the second issue:
Playing Different Games.
The problem is when it bleeds into the second issue:
Playing Different Games.
@EverettRandle wrote a must read piece last year on how Tiger is playing a different game.
Other than the awesome break down of how they are doing so, there's another nugget in there for angels:
Tiger + other VCs are ALL playing a different game than you.
Other than the awesome break down of how they are doing so, there's another nugget in there for angels:
Tiger + other VCs are ALL playing a different game than you.
Here's the landscape:
- Interest rates are non-existent
- So 60/40 portfolio is dead
- So LPs need options for yield
- Venture has done well
- So LPs allocate into Venture
- Venture hurdle rate is lower
Implication: It's rational for VCs to deploy capital as fast as possible.
- Interest rates are non-existent
- So 60/40 portfolio is dead
- So LPs need options for yield
- Venture has done well
- So LPs allocate into Venture
- Venture hurdle rate is lower
Implication: It's rational for VCs to deploy capital as fast as possible.
As a result, a lot of larger funds are turning to an "index strategy" on tech.
That's not a bad thing or a critique.
It's just different from the game you're playing as an angel.
That's not a bad thing or a critique.
It's just different from the game you're playing as an angel.
In a world in which a fund makes 10 bets, you can glean some signal.
But now most are making 100s of bets.
Also, a bet can mean very different things.
I've invested in deals where a Tier 1 Fund had written a smaller check than me!
(and my check was <$50k)
But now most are making 100s of bets.
Also, a bet can mean very different things.
I've invested in deals where a Tier 1 Fund had written a smaller check than me!
(and my check was <$50k)
So what do you do about it?
I treat this as one data point, not THE data point (which is so easy to do early on when you start angel investing).
It's natural to think *they are smarter / know more* than me, so if they passed, I'm missing something.
I treat this as one data point, not THE data point (which is so easy to do early on when you start angel investing).
It's natural to think *they are smarter / know more* than me, so if they passed, I'm missing something.
A lot of VCs say “they never ask who else is investing.”
I don't buy that. I think *everyone* asks.
And why not? It's another data point.
But try to treat it as that - a data point.
No more or less important than your assessment of the founder, the market and the product.
I don't buy that. I think *everyone* asks.
And why not? It's another data point.
But try to treat it as that - a data point.
No more or less important than your assessment of the founder, the market and the product.
There’s a company I invested in ~3 years ago that to this day is my favorite company I’m involved in.
They were doing ~$40k/month and no Tier 1 investor participated in the Seed round.
Fast forward and they just broke a $40M run rate.
It's something I think about often.
They were doing ~$40k/month and no Tier 1 investor participated in the Seed round.
Fast forward and they just broke a $40M run rate.
It's something I think about often.
If I gave "who else is involved" a heavier weighting, I would've passed on what could ultimately be a 100x+ return.
This wasn't a stroke of genius on my part to be clear.
It was me assessing the founder, market and team as the only data points because I didn't know any better.
This wasn't a stroke of genius on my part to be clear.
It was me assessing the founder, market and team as the only data points because I didn't know any better.
So in short:
- Know what game you're playing
- Trust your instincts when angel investing
- Understand why YOU like the founder, the market, the product, the business
- Know who else is participating as a data point
- Treat it as that - one data point.
- Know what game you're playing
- Trust your instincts when angel investing
- Understand why YOU like the founder, the market, the product, the business
- Know who else is participating as a data point
- Treat it as that - one data point.
