My angel investing strategy vs Joshua Schachter

Joshua Schacter has a great AMA thread on HN about angel investing. He shares a lot of interesting info about his strategy, and it's about as diametrically opposite to my strategy as you can get.

I think his strategy is essentially the Ron Conway strategy, and at his rate ("34-ish investments" in 1-2yr?), he'll be the next Ron Conway in short order. 

The strategy is pretty simple. 
  • Get access to all major deals (super high deal flow);
  • Invest in anything that seems like it may be big (lots of investments);
  • Don't worry much about terms.
For the record, I think this is a great strategy if you can do it, but I can't do it for two reasons. 

First, I don't live in Silicon Valley, which is essential to getting super high deal flow. Most deals are there, and to get access to everything you seem to have to (at least occasionally) have in-person meetings, go to parties/social events, sit on panels, etc. Bottom line, without being there, you won't get into all the deals you need to be in to make this strategy work. And as I additionally hate short trips and airplanes, I'm even less able to compensate for my home in Valley Forge, PA.

Second, I don't have enough money. Even at his small investment size (10-25K), he's still done "34-ish" deals. Quite frankly, until I show some modicum of success, that is too much outlay for me.

As a result, I'm looking for very different investments. Here are some major differences I found intriguing from the thread.

I've done 34-ish investments.

I've done three :). If you're doing the Ron Conway strategy, you're trying to get in relatively early in the next billion dollar company, or at least in ones that will sell for $100M+. That's why terms don't matter that much. When you get 100-1000x time returns, getting access to that big deal is the most important thing.

The problem is, it's really hard to tell which deals are going to be the big ones. And there are only like 15 100M companies founded each year (reference from Marc Andreessen that I can't find right now). When you cut out ones you won't do because of product area (life sciences, clean tech, etc.), the number dwindles to just a few or less.

As a consequence, you have to do a ton of deals each year, just like he's doing. Given that I can't do a ton, I've taken a different approach.

I'm not looking for the billion dollar company, or even the $100M+ exit. I view it as entering a raffle where I can't buy enough tickets to make the odds decent.

Instead, I'm looking for companies that can go big in the $20-50M acquisition range. Sure, if everything went 100% perfect, they could IPO or $100M+ exit, but the more likely "medium-high" scenario (and the one I look to) is a decent sized acquisition.

I can't or won't negotiate terms, lead a round, syndicate a deal, or sit on a board.

I'm on two boards (of my three investments). I led one and half-led another. I'll negotiate terms--you sort of have to if you're leading. Note that I'm also willing to take terms as is if it makes sense; I've done that once already.

This also follows from this standpoint of doing less deals. Less deals means each one counts more, so I'm putting a lot of effort into each deal, both before and after investment.

Use of capital is a typical open question. But no, I do not ask for a budget. They should spend most of it on people and the rest on other constraining resources.

This is an example of effort I spend before deals. I do a lot of due diligence. I do want to know about use of capital, for example, and everything else for that matter. I'm not the guy who is going to write you a check after one conversation, which you should be wary of btw. 

Startups don't generally tell me about their decisions often enough for me to be able to benchmark this, I think.

Post-investment, I'd like to help as much as possible. I don't nag or even am very pro-active since I don't want to bother founders. But I'd love to help move the investment forward, even technically. For example, I've helped with scaling/downtime/dns/email/testing issues in addition to the normal intros/strategy type help.

What portion of your investments are outside of the bay area? None.

I've done one in Philly (though they just moved to SV), one in SV, and one in BOS. Location (as long as it is US) is not that important to me.

Are you doing it for financial reward or for the enjoyment of it? Probably the second, currently. I haven't seen a lot of return in real dollars.

I have enjoyed it so far immensely, though I am definitely in angel investing to make money. As such, I'm looking to get a decent equity % so that when an exit does happen, I can make some return and do more angel investments. As I've tried to articulate above, if you're not expecting a 100M+ exit, then the deal terms matter more.

Valuations are often in the $2mm-$5mm range. Sometimes much higher. Never lower. 

I'm looking for $750K-2.5M. For deals I'm leading, the target is <=$1M. For deals I'm joining, it's above that. So there is a bit of overlap, but not much.

I think that means I'm looking at earlier deals and never "hot" deals. You don't want to go over 20% dilution, so we're talking about a minimum $200K round, and scaling up as the valuation goes up.

7/10 companies coming out of accelerators aren't getting funding. There are a lot of reasons for that, e.g. solo entrepreneurs, ideas that need major pivots, etc.  However, I think there are some great potential companies in there if they had the right mentors.

In my experience, companies raising less than 500k are making a huge mistake ... The point of raising funds is to hire people who can accelerate the growth of the business. $200k gets you a person or two, which doesn't do very much. So you find yourself raising again pretty much immediately. The fundraising process is a colossal waste of your time. An entrepreneur going this route is not making good trade-offs. In my experience, most of these companies fail.

In my opinion/experience, this is not the case if the company is already making revenue (even if just $1K total) and has some good user acquisition ideas. That's really what I'm looking for. And in those cases, I think a $200K round makes perfect sense because the money goes to acquire customers and not to head count. If the process works, then the earnings that ensue can fund head count, if and when needed.

If $200k is good but $500k is not as good, it smells like a lifestyle business. That's not bad, but it's not a good investment for me.

There are two issues here. First, that's why use of capital is so important. If the $200K is for a specific marketing purpose that fuels a viral engine, then it makes perfect sense and is not a lifestyle business. That is, if you have a real customer acquisition channel that you can pour money into, then you shouldn't need more than $200K to test that assumption. Or even less. 

Second, dilution/valuation is directly related to round size. If you're talking really early where I want to be (at lower valuations), round size is essentially capped at 20% dilution.

In any case, I agree that fundraising is a major time sink, but raising a small amount can go really fast if you have a group of co-investors that believe in what you're doing. That's what I'm trying to be part of in Philly.

I expect it will take 5-10 years to get a return in many cases.

I expect a much shorter time horizon, avg 5 years. I think the diff here is related VC exit times

Again, it comes down to strategy. If you're looking to 100M+ exits, you basically need VC. I'd fund a deal that may not need to take VC, ever.


Just to show that I'm not a complete contrarian (crazy person?), here are some things he said that I completely agree with.

Communication is key. If you want people to do things, you must communicate in ways that facilitate the action. Make it easier for me as I am bandwidth constrained.

I don't understand b2b and am terrified of it. [bc of] Sales. Seems very hard. Not that that route is bad but I understand b2c better.

I really want to see a working prototype first. Rarely do i invest without that. ... You aren't learning anything until you are interacting with users, and learning is the most important thing you can possibly be doing. Through friction the apple is polished, I think.


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