The YC/Ron Conway angel investing strategy seems to me to be: focus on finding really smart, determined people, and the returns will follow.
Their strategy makes perfect sense for them, but not necessarily for me.
Here's them:
- Essentially unlimited funds to invest in who they want.
- Incredible deal flow, probably capturing a large % of promising early stage startups in their investing spaces.
- Lots and lots of deals.
Here's me (you probably know what's coming):
- Orders of magnitude less funds.
- Orders of magnitude less deal flow.
- Orders of magnitude less deals.
Paul Graham was just on Mixergy saying potential exits are so unpredictable, he doesn't even think about them when making investment decisions.
My premise is I can't do that because I simply don't do enough deals and don't have similar deal flow. Given these facts, I think angels like me probably need a modified strategy. Essentially, we should have a higher bar to invest.
Yes, we should only invest in smart, determined people. Yet I think we also need to think at least a little bit about exit probabilities and magnitudes.
But doesn't that contradict Paul Graham's point that they are inherently unpredictable? I don't think so if you concentrate on more realistic exit possibilities.
That is, I agree that exits are unpredictable, but big exits are way more unpredictable. Googles are pretty much black swans. IPOs are less rare, but still pretty rare (at least in the past decade). And 100M+ exits happen somewhat frequently, but are still rare enough that YC hasn't had one yet in its five year history.
But they will--it's just a matter of time. Ron Conway has had many big exits over his longer time span. Both YC and Ron Conway will make their great returns on these rare, unpredictable events.
And that's the thing. I don't think I can count on being part of any big exit event at my small deal rate. But I think I can ensure more of a chance of decent returns (as opposed to super great returns) by thinking a bit about potential exits.
I should probably look for founders with some idea about customer acquisition and/or market. For example, a founder doing something interesting in the dating space would probably be more interesting for my strategy than a founder doing something in a brand new market with great yet completely unproved potential.
The bottom line is their strategy might get them in on the next Google. However, me following their strategy at my deal rate will most likely not get me anywhere close to the next Google. But with a modified strategy, I can probably still make decent returns and work my way up to their strategy, which I would of course love to do if I could.
