Takeaways from three years of angel investing

 
Three years ago we (my wife and I) started angel investing. We set aside $250K to make initial $25K investments in ten startups, and possibly invest more in follow-on rounds if it made sense.

Here are the basic stats:
  • We've made eight initial investments and one follow-on.
  • Two exited (Notehall and Locately), one died (Wakemate), and the rest are looking good.
  • I syndicated (helped them put together the round) in five: Notehall, MyZamana, Locately, Zippykid, and Instinct.
  • I took a board seat in three: Notehall, MyZamana, and Locately; I took an active advising role in Instinct.
  • Five of these companies are consumer; two are enterprise; Zippykid is in-between.
As you can tell, I am not a super angel by any means. I don't have the time or money for it, so take my takeaways with that caveat.
I can't report on the exact values of the exits, but they've returned a bit more than what we set aside initially. That means we feel comfortable continuing to invest indefinitely and I feel confident about executing on an angel strategy.

There are a lot of nuances to angel strategy (that I won't detail here, but am happy to get into in the comments and elsewhere). Our basic strategy thus far was as follows:
  • Put the same amount initially in each (since you don't know what is actually going to work).
  • Spread out over a number of years (since historically some years do much better than others for macro reasons).
  • Get an edge (lower valuations, better deal flow, etc.) by leading rounds and being willing to jump first.
  • Try to actively add value in ways that actually improve outcomes for the companies.
  • Invest in companies that may not need much follow-on to be successful (series A crunch, etc.).
  • See a straightforward path to victory for $10-20M exit and get valuations that makes those economics work.
  • Location agnostic.
  • Theme agnostic.
I believe this strategy will make you money as an angel investor and would continue to make us money if we continued to pursue it, but for a variety of reasons I'm evolving our strategy away from it. In fact, the two deals that made us all our money so far probably wouldn't work on this new strategy. Here are the differences.

Location agnostic. Focus on Philly. I'm going to be living here for a long time (I'm actually 25mi outside Philly in Valley Forge). In the last five years a lot has changed around here, and it keeps getting better. That means practically at our level and frequency of deals I should be able to do them here without compromising outcome. 

Theme agnostic. Stick to transformative consumer companies. I want to be fully engaged in everything I do, and I've found I'm just not as interested in enterprise stuff and stuff that is not truly transformative. Also, all my own companies have been on the consumer side.

See a straightforward path to victory for $10-20M $30-50M exit. This change goes along with being transformative as things that are transformative are naturally going to get a bit bigger if they're successful. However, I'm still not looking for the next $B company or even hundreds of millions, though if you get to $30-50M range you often have an opportunity to decide to go for that bigger range or not. What this change is really cutting out is smaller, niche markets where you can do decently well but you won't make a huge impact. It also means practically that you see a logical path to $3-5M in revenue.

Try to actively add valueI want to be involved if possible (not possible in all cases, but generally a reason to pass now). The companies I've been active in I feel I've made a real difference and learned a lot from. And I've formed better relationships with those people for future ventures.

Know people for longer. As said, I've found I don't like passive investments. If you're going to be active, you want to make sure you really want to work with someone. Additionally, you can often get better deals (which works for both sides). That is, if you're around at idea formation you can not only be first money in but help them early on where it can really move the needle.

Getting an edge, spreading out deals and risk, and investing in "frugal" companies are all staying the same.


More takeaways:

Lots of angels aren't in it solely for the money. Some don't care at all about money, some care some but have equally competing interests (status, fun, giving back, etc.).  The problem with this is if you do care about making money (like me) you're competing against people who don't.

VCs are worse -- they care but not in this stage; they're buying an option for later stages. Either way this all drives up valuations and down terms. You could look at this as unilaterally good for entrepreneurs but I don't think it is because it prices out completely people like me. I pretty much know out of hand no YC deal is going to be good for me unless I had gotten in before YC. And that's my perceived solution to this market change. 

Go earlier. I believe in Mark Suster's advice to get early advisors/investors and give them a deal. Having a mentor is awesome -- I wish I had paid more attention to mentors in my first company. And getting one is not that difficult. On the angel side it is being willing to jump pre-revenue and even pre-launch. I think if you know the people this can all make perfect sense and is a major win-win for both sides.

Beware of the acquihire. It's real. And it is really changing dynamics. I don't begrudge anyone for taking a smallish exit. I did. You can't argue with the economics. But at higher valuations it makes little sense to the investor. Especially if I'm going to be actively involved, I want to work with people who really want to make this company their life's work or at least for the foreseeable future (read 5+ years) just like I'm doing with my company.

The problem it is that is hard to gauge, because people don't really know until the offer is in front of them. However, I think a proxy is passion in the idea and consequently how transformative it is. That's another reason why I'm switching theme focus to there.

Opportunity cost is large for active investments. Three years ago DuckDuckGo (my startup) was a lot less farther along. Now it is very clear that time spent on it is immensely valuable in a variety of ways (financially and not), and anything competing with it has a much higher bar.

This means that in a success case for an angel investment needs to be a bit higher to feel equally successful. It's weird, but that's how it is. So this speaks to owning a bigger % at that time. This can be achieved by some combination of a) putting in more money initially; b) getting a good deal (e.g. by being early, etc.); c) getting compensated for active participation. I'm moving towards all three.

Board seats are work, but party rounds suck. I've tried to use the Series Seed docs for deals I've put together and only modify a few things (like 2x liquidation pref). This has generally meant a board seat. It doesn't really have any effective control but it comes with fiduciary responsibility and other duties. I think it is too formal, but I still think having an investor structurally involved (say 4-6 week meetings) is ideal. The liquidation pref matters less in this new strategy, so I'm planning on going back to 1x (standard Series Seed terms) plus striking the board seat. I still don't like convertible debt for a myriad of reasons.


If you're in the greater Philly area and doing something transformative in the consumer space, please let me know about it. You can come to my office hours or apply to Open Angel Forum Philly (watch this blog for upcoming announcements).

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I'm the Founder & CEO of DuckDuckGo, the search engine that doesn't track you. I'm also the co-author of Traction Book, the book that helps you get traction. More about me.

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