How five of the most successful angels make their investment decisions
As an angel, the biggest thing in your control over the success of your investments is picking the winners. How do the most successful angel investors do this and what decision models do they use?
I started to collect the perspectives of some of the most successful angel investors. From their process to how long it takes for them to make their decision, I wanted to understand what, if anything, sets them apart.
Is it really possible to calculate who the big winners will be or did all of these angel investors just get lucky/ have enough money to play the numbers game? Either way, there are certainly some useful learnings to take away from these five investors.
1
Dharmesh Shah
Founded Hubspot, Angel Investor
# of angel investments: 60+
Exit Rate: ~40%
Notable investments: Buffer, Coinbase, Angel List, Change.org, Stack Overflow
In a recent podcast interview, Dharmesh revealed that he only spends 5 minutes looking at a deck and makes his decision within 24h. Why so quickly? Well, he states that his time is much more valuable than the money he would lose if the company fails, and therefore for him it is not a good financial decision to spend hours on due diligence. The way you decide will be dependant on your reasons for investing in the first place, and for Dharmesh angel investing goes beyond wealth creation, he says he invests for two reasons: the first is to live vicariously through other founders, and the second is to have an ownership in something that could be the next big thing. And these are simply more of a gut feel than due diligence/data room kind of factors in the decision making process. Regardless of the reasons, many of his investments have had significant success.
Learning: Work out how much your time is worth and don’t spend more time on due diligence than the amount of your investment i.e let’s say your time is worth 20k per day, if you’re investing 20k, spending a day or more on due diligence is technically costing you more than the potential loss of the whole investment. Joining an angel group is a great way to significantly cut down your time spent on due diligence as the work load is shared between members.
2
Paul Graham
Founded Viaweb and Y combinator, Angel Investor
# of angel investments: 33
Exit Rate: ~30%
Notable investments: Wufoo , Socialcam, Seed
Paul Graham is a tech startup legend in Silicon Valley, he has created his fair share of impact both through companies he has built, companies he has invested in, and through his content. In one of his famous blog posts on angel investing he talks about the role of the angel investor in contrast to other types of investors, he says ‘VCs often try to notice quickly when something is already winning. But as an angel you need to be able to predict what is going to win and ultimately this means that you have to bet on people.’
Learning: Focus on evaluating the people more than the business or market. And when you do look at the business and the market it is in, base your decision more on forecasting the opportunity rather than assessing what is already there.
3
Simon Murdoch
Founded Bookpages, Angel Investor
# of angel investments: 54
Notable investments: Shazam, Zoopla, Shutl
Exit rate: ~40%
In a podcast interview, Simon shared that to get a big return, you don’t always need to invest in the really big players. He says: ‘a huge market doesn’t have to be there, a company that sells for 5M can give you a big return, you just need to go in early enough’. Perhaps this is a more British view compared to the usual big-thinking US investor approach, but it’s a valid point that takes the pressure off finding ‘the next big thing’. It also helps you to be more aligned with your values of investing in things that are seriously valuable on a local level.
Learning: You don’t need to invest in a unicorn to make a big return, you just need to go in early enough on a reasonably successful business i.e if you invest 20k in a pre-seed company at 500k valuation that exits for 5M or you invest 20k in a growing startup at a 10M valuation that exits for 100M, you’re still getting a 10x return from both. The earlier stage company could be a riskier investment, but the larger company will likely have to raise consecutive rounds, which will dilute your investment even further.
4
Marc Andreessen
Founded Netscape, Angel Investor
Number of investments: 37
Notable investments: Slack, Twitter, Asana
Exit rate:~70%
We already know that evaluating the people is a key factor to deciding whether to invest, but more specifically, Marc focuses on assessing the founder’s judgement. How does he do this? Well, if the founder has started companies before, you review their decision process throughout their journey. If this is their first startup, you have less to go on and so perhaps you expect more from them in terms of what they have managed to do in this business prior to the investment.
When it comes to evaluating the actual business, Marc expressed in a Bloomberg interview that unlike other types of investment, as an angel the biggest mistake you can make is not when you invest in something that ultimately fails (this is going to happen a lot), the biggest mistake is not investing in something that ultimately succeeds.
Learning: Consider improving your forecasting skills over your assessment skills when evaluating the business. And when evaluating the founder, dissect their journey and how they got to where they are. Would you back that judgement?
5
Caterina Fake
Founded Flickr, Angel Investor
Number of investments: 27
Notable Investments: Kickstarter, Etsy, Cloudera
Exit Rate: ~40%
Caterina has expressed that her process for creating the thesis for a fund she now runs is to reverse-engineer the most successful companies. In an interview, Caterina says: ‘What we did was retrospected all the stuff that has done really well, and what they had in common is that they were all vanguards of movements. Etsy became the vanguard of the DIY movement. Kickstarter became the vanguard of crowdfunding, Blue Bottle Coffee was the vanguard of the artisanal coffee movement.’ Reverse-engineering the kinds of companies you wish you had invested in, is a good way to build a foundation for your own thesis.
Caterina was one of the first investors in Etsy after a number of top VCs passed on the opportunity. On a podcast interview she said: ‘One of the reasons VCs passed on investing [in Etsy] had to do with the fact that they were predominantly men who weren’t aware of the market potential for hand-crafted and vintage items. They said, “This is a marketplace where a bunch of women are knitting things,” I said, “Yeah, but it’s huge.” There’s an advantage in some ways of being a woman investor,” Fake says. ‘I’m seeing a lot of businesses that I think my male colleagues aren’t seeing as well.’
Whilst the lack of women investors is a problem that needs fixing, being a female investor also presents an opportunity and a unique perspective on picking the winners.
Learning: It can be tempting to follow the crowd or change your mind because of another successful investor’s feedback on a business. Whilst it is valuable to discuss investments with others, it’s important to understand what your unfair advantage is and considering your strengths when making your investment decisions.
