What It Takes To Be A Great Angel Investor: Part I

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Executive SummaryI believe the rise in angel investing is here to stay and the professionalization of this class (aka “super angels” or “micro VC”) is a good thing for the VC industry and for entrepreneurs.

It is basically a return to the type of VC that was done 20 years ago long before the craziness of the Internet boom that skewed things so greatly.

But with its growth and success it will encourage many people to enter the market who will lack 5 critical success criteria for earning positive returns.

This is exactly what happened in the broader VC industry between 1999-2001 as many people without the requisite skills entered the industry. I believe that if you have 5 distinct skills you have a good chance at making great returns. I will publish what I believe the five are in a series of articles.

But I fear that for most angel investors who invest over the long haul angel investing will not be a profitable endeavour. In fact, many really bright & connected people will privately tell you they’ve put much money to work and still don’t have many exits to show for it. And for some reason this seems like it is seldom talked about in the press as we celebrate every check written and every name attached to them.
There is a downside. I assure you.

The Details:

I recently finished reading “The Big Short” by Michael Lewis. It’s a non-fiction story of many of the players at the heart of the financial crisis that became exposed in 2007/08.

It got me thinking about how in poker and in investing there are usually a few pro’s at the table and many suckers. And as the old saying goes, “if you don’t know who the sucker at the table is – it’s probably you.”  Here’s Lewis on gambling vs. investing:

“The line between gambling and investing is artificial and thin …. maybe the best definition of ‘investing’ is ‘gambling with the odds in your favour.’ “

This theme is reinforced in Tony Hsieh’s (the CEO of Zappos) amazing book, “Delivering Happiness” in which he describes business in a poker metaphor (paraphrasing, don’t have the book in front of me),

“the goal in poker is to find the table where you have a lot of bad players so that the odds are stacked in your favour.  It’s the same with business – choose a market in which you have better odds at winning because you’re playing against less sophisticated players. If you’re at the wrong table, get up and walk over to a different table.”

Angel and super-seed investing are currently the “hot” area of the market right now and for good reasons.  But that doesn’t mean it’s a free-for-all for people to make money. Mostly, this segment of the market (like all of VC) is stacked in favour of the few. We all think it’s an even table and we have the same shots at making money as the next guy. Unfortunately that’s a myth.

So I’m going to offer my view on the “angel poker table” so you can decide if you really want to sit there. If you do, make sure you’re not the sucker.

Here’s what the angel investors (whether individual or professional ‘super angel’ funds) who will win at your poker table will have:

1. Access to the best deal flow – I think the most obvious thing you need to be successful is access to the right deals in the first place. Unfortunately nearly every investor “thinks” that he/she has access to great entrepreneurs, but think about the people who are sprouting up in Silicon Valley now that are developing great track records in angel investing:

•  Keith Rabois, Reid Hoffman, Dave McClure and Peter Thiel – all part of the “PayPal Mafia.”  Many have now gone on to other successful ventures such as Slide (bought by Google for $182 million), LinkedIn (founded by Reid, invested in by Keith), Founder’s Fund (established by Peter and very early investor in Facebook) and Dave who is a consummate Silicon Valley insider and sought out by many founders.

•  Aydin Senkut, Chris Sacca, XG Ventures – all ex Googlers (XG actually stands for that).  ny big surprise that Chris is a very early investor in Twitter founded by Evan Williams who worked at Google after selling them Blogger.com?

•  Founder Collective – run by David Frankel & Eric Paley (both ex successful entrepreneurs and Harvard Business School alum and East Coast Insiders) as well as Chris Dixon (sought out by every East Coast founder & many West Coast ones) and Caterina Fake (co-founder of Flickr)

I could obviously go on. But great companies are often founded by people who cut their teeth working at a successful venture and then taking their insights and going it alone. Their first call is often into one of the above or the many other successful early stage investors including Marc Andreessen, Jeff Clavier or Mike Maples.

Do you have access to that kind of deal flow? How about teaching engineering at Stanford and seeing the best & brightest before they’re even out in the wild. That’s Ann Miura-Ko of Floodgate. Or teaching entrepreneurship at Stanford like Steve Blank.

Can you really stack up against people who have been sitting at the table longer, calculating the odds better and learning the ropes of how to best play their hands?

Are you sure? Is yes, have a seat. Look at a few hands. But make sure you have all 5 skills. Deal flow alone is not good enough.

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