[propter_hoc]

With much love for my angel investors, angel investing is absolutely a mug's game.

If the company doesn't get off the ground (vast majority of investments) you lose all your money.

If the company does get off the ground, you are the lowest on the pref stack, and you have no ability to follow on to protect your position. You're not a contributing employee or meaningful future source of capital so your piece of the pie is just dead weight on the cap table. This means every single subsequent investor (and the founders, if they care more about money than their relationship with you) has an incentive to cram you down.

So net net the chances of success from passive angel investing are only slightly better than playing the lottery.

Best approach would be to make very few investments, where you're able to build a special relationship with the founder, and ideally get a board seat to defend your stake.

===

Edit - to be clear, I don't think startups should be giving board seats to angel investors. It does happen in exceptional cases where the angel is uniquely valuable to the company, and those are the cases where the angel can defend themselves. But they are rare, which is why it's mainly a bad game to play.

[alexeichemenda]

>Best approach would be to make very few investments

Top VCs—who see the best deals and run deep diligence—still only have a 1–5% hit rate. As an angel, you don’t have that level of access or time. Even if you get strong referrals, you’d need to be 10–15x better than elite VCs to pick winners in a small portfolio. Unless you’re investing in at least 10 companies, it’s statistically a losing game.

My experience: I invested in ~200 companies early stage (with some winners like HuggingFace, Checkr & more).

[jll29]

"...and run deep diligence"

I've not seen that much but what I've seen is "Let's ask a few buddies and google a bit".

The takeaway that I agree with is the parent's and OP's point that you will need to invest in a lot of companies, perhaps 30-50, and you will nee to be in for the long term.

[throwaway2037]

    > with some winners like HuggingFace

Is HuggingFace public or acquired? I checked Wiki. It still looks pre-IPO/un-acquired. So, how exactly is this investment a "winner"?

[michaelt]

It might not have paid back the initial investment, but the company isn't bankrupt, and you've heard of it.

By the standards of people who invest in 100 start-ups at once, that's success.

[bobxmax]

You don't need to sell your stake for it to be a winner. It's a winner because his stake in the company is worth significantly more than when he bought it.

[robocat]

Plus the bragging rights: a lot of the angel and VC buzz seems to be about playing for status (versus playing for money).

You see this with celebrities investing, and with the intro "I was an early investor in ____" brag.

[onlyrealcuzzo]

A lot of angel investors are not investing particularly large sums, and a lot of what they're doing is buying someone that's going to use services other people they're connected to are selling.

When you're multiples are 10,000x revenue, a lot of people will shell out $10k to get you onto a few startup services...

That's the investment itself. Not getting paid back.

[kjkjadksj]

Can’t you just deploy 1/10th the capital and get the same hit rate?

[dmos62]

What's your biggest motivation for doing angel investing?

[iwontberude]

Developing a network of people who do favors for each other and learning about other people’s businesses and industry. Angel investing usually isn’t that capital intensive, so it’s sometimes worth pursuing. I don’t do it to get rich.

[code_biologist]

At my last startup, I think our board and observers liked hanging out more than they liked talking about the company. It wasn't perfect, but it's their money so I wasn't going to complain.

[speleding]

As an angel you do have a few advantages over VCs. There is no pressure to invest a certain amount within a certain time frame, so you can wait as long as you like until something comes along you really like. You can also do very small tickets, whereas a VC cannot afford to waste time on small stuff.

But I agree making money should not be the focus. I like to think of it as a "giving back to society" hobby. I enjoy supporting entrepreneurs, society needs more of them. I enjoy talking with the other investors, most of them other entrepreneurs like me. By contrast, other people my age buy a boat or a Porsche, angel investing makes me feel more useful.

For reference: I've only made 6 investments as an angel over the last decade, mostly SaaS, one exited at 12x, one died, four are still going at various levels of success but all healthy. So making money is possible, even if it's not the goal.

[tinyhouse]

I'm not sure I'm following how anyone can target the angel investors specifically? Aren't all common share holders have the same fate? So if they screw the common share holders, early employees will get the same treatment as the angels? (dilution for example impacts all share holders). I understand that key employees can receive extra shares along the way, but most probably don't in their first 4 years.

[RainyDayTmrw]

The way I've heard it is that later investors collude (descriptive, academic term, not value judgment) with founders via liquidation preferences, dilution, etc., and effectively wipe out all common shareholders (particularly employees) and all earlier rounds, and then give the founders some additional terms to compensate them specifically. How exactly that works, what they're giving the founders, and how this isn't hugely illegal are all details that I don't understand. I put a top-level comment asking exactly that.

[propter_hoc]

That's exactly the approach. Seen many deals where the (remaining) founders get a big slice of new vesting options or reverse vesting shares as part of a recap or semi-distressed round.

Nothing illegal about it when the company needs the money, just one investor can write the terms they want, and the founders are on board with the plan.

[RainyDayTmrw]

I understand that, particularly in a down round, investors can push to get more. What I don't understand is what allows founders to get a side deal. It seems like that would go against fiduciary duty to common shareholders and earlier rounds.

[propter_hoc]

It's because the investors still need the founders to run the business, usually.

[RainyDayTmrw]

More bluntly, why wouldn't/can't the other common shareholders sue?

[newsclues]

But it sounds like the ford v dodge brothers cases that most abuse as an excuse for corporate profit maximization.

A company should not work to enrich some shareholders at the expense of others

[themanmaran]

Yea the founders also have majority common stock. So there's not a normal scenario where the founders and other investors get paid out in an exit, but the angels don't.

The bigger fear is a non-exit scenario, where the company becomes profitable, possibly pays out large investors to maintain the relationship, and founders just take massive salaries. So no liquidation event that benefits angel investors.

[ummonk]

Yes, being an early employee is a sucker's game in much the same way as being an angel investor.

[pea]

You can do a pay to play where anyone who can’t follow on at a certain price gets wiped out

[paulddraper]

Founders/employees can receive additional grants.

[pfannkuchen]

Isn’t angel investing more about networking and feeling like some elder statesman than about returns? That’s my impression anyway, as a non-angel.

[wslh]

This, and I'd add that one underrated upside of angel investing (and being LP of funds) is access to real, unfiltered information about the startup and the market. That's often far more insightful than the "everyone is crushing it" narrative you see in the media. In the article, the author mentions that she found other ways to get that info.

[gorgoiler]

Is it a thing for angels to exit in the early rounds?

Instead of being shoved down the cap table by a giant tranche of series A preferred stock, might it not be appropriate to give the angel a payday instead?

I guess some angels want to keep their fingers in the pie? And, more likely, it’s just not a reasonable expectation to see an exit like that way before anyone else does?

[motoxpro]

It’s just the same thing as a take profit in the stock market. Intellectually it seems reasonable but because a lot of the bets go straight down (never raise another round for that take profit opportunity) you need a higher multiple of the ones that win.

You end up taking profit at a 1.1 return and in 10 years it ends up being uber.

Positive skew strategies (lose a little on a lot of bets and win big on a few) are impossible to use take profits on because you need those big winners.

[DrAwdeOccarim]

Yea, I’ve seen cashing out the principal+next investment and letting the rest ride.

[chii]

early exits probably won't get the type of return that an angel investor would be interested in monetarily, since you need more than fu-money to motivate them.

[paulddraper]

No Angel investor is looking to 2-3x their money.

That’s not why they do it.

[robocat]

Same author talks about Angel investors getting screwed by later rounds.

  Here’s an example of a portfolio company that not only converted angel investor ownership to common stock, but also drastically decreased the number of shares.

  I started asking for pro-rata side letters in 2017. But I recently found out (the hard way) that it’s common for follow-on investors to completely disregard any pro-rata rights of angel investors.

https://www.halletecco.com/blog/angel-investing-part-iii#:~:...

Perhaps also relevant:

  Founders, like entry-level workers, are closer to an option than a stock. There's a good chance that the payoff will be negative (in the sense that sometimes a company going to zero is a significant time-consuming process to investors). Someone who continuously buys out-of-the-money options will bleed money over time,

From: https://capitalgains.thediff.co/p/the-favor-trading-economy

[bilsbie]

Is it not reasonable to ask for a seat in every investment?

[hellcow]

A general rule of thumb is that you have 3 board members at the seed (1 non-CEO founder, the CEO which is typically another founder, and the lead investor). So you have 1 seat available for investors, whereas you may take 5-20 checks. Not everyone is getting a seat.

At the A you usually expand to 5, adding the lead of the A round and an independent board member. Beyond that, it’s common for the earlier investors to get replaced on the board in future rounds and maintain observer rights.

[algo_trader]

What happens if your "lead" angels want to put money but not a board seat?

[bcantrill]

If you are taking truly no institutional capital, it's a party round -- and unless you have a repeat founder that knows exactly what they're doing (and often even then!), it's a huge red flag.

[toomuchtodo]

https://techcrunch.com/2022/08/31/lets-talk-about-party-roun...

[bix6]

A board seat? Absolutely not, you’re a minor investor.

A pro rata opportunity? Maybe but why wrangle 50 angels when you can have 2 firms cover it?

[edoceo]

You don't do 50 angels. They're in one SPV and you only work with the deal-lead (while getting investment from N investors)

[bix6]

Hopefully but not always

[BlandDuck]

Too many investors, too few seats

[codezero]

Very few of the startups I’ve worked for have given board seats before Series B.

[bee_rider]

> So net net the chances of success from passive angel investing are only slightly better than playing the lottery.

Is this right? An organization running a lottery—their whole job is to run a lottery, they’ve staked their reputation on the fact that they pay out to winners. The one with a reputation to defend is the one paying out.

The company angel investor is dealing with a company that, ultimately, wants to either get into position to sell some service, or wants to get bought. Their raison d'etre isn’t being a reliable payer-out of winners. I’d expect the lottery to be much more honest.

[johndevor]

> Is this right?

OP made an unbacked assertion and that can be ignored as such.

[bee_rider]

Eh, this is a site for chit-chatting, so I don’t expect perfect proofs generally. Assertions that are backed only by personal experience and hard-to-verify anecdotes are fine IMO.

[thr0w]

> Eh, this is a site for chit-chatting, so I don’t expect perfect proofs generally. Assertions that are backed only by personal experience and hard-to-verify anecdotes are fine IMO.

Source? Footnotes?

[bee_rider]

Lol, right?

Getting away from the original posts, but: The reflex to ask for sources probably comes from a good place. But, it has become too immediate nowadays online, to the point where (in my opinion) it gets in the way of discussion.

The request for a source should generally include a note on how the fact being questioned will impact the overall argument. Friendly conversations shouldn’t become asymmetrical homework generating exercises.

[paxys]

At best it’s a stepping stone to a “real” VC job.

Take a couple years to learn how the industry works, make connections, maybe even get lucky with some bets. Then use all that to either start your own fund or get a job at a big Silicon Valley VC firm.

[peterlada]

Way off. Angel investing is betting on people you know well enough.

[paulddraper]

Correct.

The best use of angel investing if anything is building a track record, for VC.

[Mbwagava]

Hell, investing in general is a "mug"'s game (never heard this phrase before) if you go by per-capita return. It's the exceptionsl performers that make an outsized contribution to revenue that floats the whole boat.

[sanderjd]

I read the point as being that angels can't really afford to invest broadly enough to hit those exceptional performers.

[jay_kyburz]

>Four others that raised money but with painful recapitalizations that effectively wiped out early shareholders

I think its the recapitalizations that make the investments unfair. To buy a stake in a company then have it diluted by the bigger fish once a lot of the risk has been mitigated is BS if you ask me.

[jxjnskkzxxhx]

How come Peter thiel wasnt diluted in Facebook?

[paulddraper]

He was.

But it’s Facebook.