I’ve been reading some epic threads, so I’ve been inspired to start my own (shoutout to Tripod and MoreMoney19).

I’m pretty lucky - the first venture investment that I ever made turned out to be one of the best biotech exits ever. I’m now a full-time angel investor in tech and biotech. I spend a lot of time managing the rest of my money as well.

At the time, I was thinking about investing in another biotech startup with some really cool tech. One of my old college buddies was a VC, so I sent the deal to him to get his perspective and because I thought that he would want to invest. He said that he would look at it, but asked me to help out with one of the biotech deals that he was working on. Of course, his deal was way better than mine. So when I got the opportunity to invest in his company I jumped at the chance. Knowing that this was a once in a lifetime opportunity and being the gambler that I am, I basically went all-in.

One reason why I was investing in private companies is that some of my college classmates were VCs and I thought that I could do it too. I grossly underestimated how hard investing in startups would be, but I guess what saved me was that my friends were really good. I learned a lot from them, which is similar to how poker players learn a lot from their crew.

Before that, I was investing in the stock market with money from my software job. I read every investing book that I could get my hands on. I really liked the books from Graham, Dodd, and Buffet, but my investing style was really my own creation. I never really had a huge cash at any of the startup companies that I was at. I just took the money that I had and made it grow by investing.

If I wanted to take venture investing to another level, then I could probably raise money for a small fund now. However, I don’t like asking strangers for money and I just want to concentrate on investing. If the returns on my recent venture investments work out extremely well, then I could probably become a partner at a well-known VC firm. I’m not saying that this is likely, but it’s one of the best ways to make partner at a VC firm.

You guys can ask me anything about angel investing. I’ve never worked at a VC firm, but I know plenty of people that do, so you can ask about that as well.

Without getting into exact numbers, best and worst results from a given time frame? IDK if VC can have best and worst days like poker, but if it can then down to the day?

Also if your first investment had gone poorly do you think you still would be doing VC?

And how does it feel telling people of a given company youre going to invest in them?

How does the company's alignment/non-alignment with your morals/values play a part in your decision-making process?

Do you play poker? If so, what stakes? How does it feel to play with "chump change?"

What's your typical time frame with entering and exiting?

What type of capital structure do you usually use? Straight equity? Liquidation preference?


How do you do this by yourself? Where do you find the opportunities?


Have you ever taken a 100% loss?

You can have some epic runbad in angel investing. I met a high-tech executive from Silicon Valley who invested in 100 different startups. The terminal value of all of them - zero. A complete loss on all of his investments. Then he invested in a company called Facebook, which more than made up for all of his previous losses.

Venture firms can have bad returns as well. Sometimes, investors won't even get their money back. These firms will have trouble raising another fund and you won't hear about them again. This isn't really running bad. Some people will have no clue how to invest, but will be able to raise money for a fund. This actually happens a lot more than you would think.

The records for investing are by fund size. It's much easier to make lots of money with a $50M fund compared to a $1B fund. If I had those numbers, I probably couldn't share it on this forum though. If you look at who has invested in the largest startups you can guess how much they made.

If my first investment went poorly, then I would be confirmed busto and be back grinding at the software industry.

I feel a mild sense of accomplishment after writing the check for some of my best investments. Also, I feel really lucky to have found the company.

Thanks for doing this.
1)Which books in this topic would you recommend?
2)How important is access in terms of deal flow quality? Does the avg angel has the kind of access that would enable successful investing to occur?
3)Are you located in SF? If yes, do you think that people that are not can achieve sucess in this are?
4)Is the avg startup negative EV?

Can you explain to me how an angel investment works and what are the standard terms usually?

Shady companies usually serve a small niche, so they can’t become big enough to be good investments. You want to invest in the next Facebook and not the next backpage.com. To get the right odds, a company needs to have the potential to be worth a billion dollars.

Company culture can be an enduring, long-term advantage that is difficult to replicate. It leads to customer satisfaction, returning customers, loyal employees, and makes recruiting easier. Most investors underestimate how important this is. Bad culture leads to all sorts of problems that you eventually read about in the news.

I’m struggling to play 1-2 NL live, since most of the poker that I’ve played is limit. I used to play 20-40 or as high as 40-80 limit back when the games were pretty soft. I guess poker has always been chump change for me, which is one of the benefits of having a real-world job. The money just how you keep score.

How is the competition?

Where do you get your edge from?

Biggest regret?

Are angel investments most only for tech related companies?

Why should someone use you?

I expect an exit will take at least 10 years. I would consider 5 years to be an early exit.

I usually get participating preferred shares with a 1x liquidation preference. This means that I get my money back first, then all the profits are split between the investors, founders, and employees. Sometimes I will buy common shares from founders, but I would expect a 15% - 25% discount from the preferred shares.

I mostly rely on the network of people that I work with for deals. Sometimes a company that I’ve funded will let me know about a promising company that they’ve met. Occasionally, I will meet a VC that is looking for some investors to close a funding round. Some people have success using angel groups, but I’ve never been part of one. There are also conferences that I could go to, but I’ve found that the signal-to-noise ratio on these is really high.

I haven’t taken a 100% loss yet, because most of my investments are recent and there hasn’t been a recession for a while.

How much money would someone need in order to be an angel investor?

Recommended Books:
Zero to One
Done Deals
Venture Deals
eBoys

Deal flow is one of the most important aspects of angel investing. It’s similar in importance to playing good starting hands in poker. It just makes the game so much easier when you have good deal flow.

I don’t think the average part-time angel has good enough deal flow to be successful. They end up looking at deals that the venture capitalists, startup incubators, and super angels have already passed on. If you're doing it full-time, you are much more likely to generate the deal flow that you need.

Most of the companies that I invest in are located in the Bay Area, but I don’t live there. I used to live there for many years, so I do have lots of connections in the area still. I travel to SF a few times a year to catch up with friends, get updates on companies, and look for new deals.

You can probably have success being an angel in New York, Boston, or LA. In other cities, it will be very difficult to be a successful angel investor, just because there aren’t enough good deals. In a smaller city, over a ten-year period, there might only be two companies worth investing in.

There are websites such as AngelList that gives you access startups no matter what city that you live in. The less startup activity in your city, the more important it is to source your deals online.

The terminal value for the average startup is zero. It’s definitely negative EV.

What are the specific mathematical models you use to valuate companies to invest in?

Venture investments are investments in startup companies that are usually in tech or biotech. Investing in a new bar or restaurant wouldn’t be a venture investment.

Angel investments are made by individual investors deploying their own capital. A lot of time angels are the first checks into a company outside of friends and family. Angels write smaller checks so they aren’t seen as often in later rounds financing. When a company is raising $100M, it doesn’t make sense to talk to an angel for a potential $25k investment. It would just take too long to get all of the money that you need from angels.

There aren’t standard terms for an angel investment, but you will see a lot of SAFE notes and convertible promissory notes which will have a valuation cap and discount to the next financing round. Financing rounds led by a venture capital firm will usually be priced rounds with preferred shares.

I haven't met any angel investors that take outside money. Some successful ones have started their own company, but at that point, they are a venture capital firm.

I think he's asking for what sort of cagr or x-times return you're shooting at.

Some cool AMA's in the BFI section - thanks for doing this Ranch99!!

Am quite fond of the show Shark Tank Is business advice sometimes part of deal?

Do you have a vision or a dream that guides your picks?

Angel investing is a co-operative game you play with founders and other investors. Everyone gets a big payoff when the startup is successful. So it’s not a zero-sum game and there really isn’t any competition in that sense.

When you meet other investors, sharing deals just naturally happens since a startup that you invested in will often need more money. It’s also great to talk with other investors about what they really like about a company or what their concerns are. I think it’s one of the better ways to become a better investor similar to how talking about poker hands makes you a better poker player.

Angel investors have a symbiotic relationship with venture capitalists. A VC will have room or make room on the cap table for angels that can provide some value. It makes sense because an angel can provide a lot of value relative to the size of their investment. Angels can return the favor by encouraging startups to let their favorite VC lead the next round. Angels can provide enough money for a startup to get off the ground, but a VC is needed to write larger checks to fund the growth phase of a company.

Venture capitalists do compete with each other though since there often isn’t enough room for two VC-sized checks. They also compete on returns and reputation as well. Everyone in the industry knows who is atop the Forbes Midas List.

I don’t have any regrets so far, but you should check out Bessemer's anti-portfolio page. It describes why they passed on some huge companies including Facebook, Google, eBay, and PayPal. What they thought about those companies is hilarious in retrospect and definitely worth reading.

The best question to ask any investor by far is “what’s your edge?”. I’ll address this in my next post.

I really liked the book "Angel" by Jason Calacanis for a real hands-on approach to getting into angel investing

http://www.drexit.net/index.html
This website has been constructed to allow the free download of a set of eBooks written by Dr. Tom McKaskill (Dr. Exit). eBooks in pdf format may be downloaded and distributed for free.

Free (pdf) eBooks:

Invest to Exit - A pragmatic strategy for Angel and Venture Capital investors

Raising Angel & Venture Capital Finance – An entrepreneur’s guide to securing venture finance

An Introduction to Angel Investing - A guide to investing in early stage entrepreneurial ventures

Ultimate Exits – The secret behind selling entrepreneurial ventures at staggering prices

Ultimate Acquisitions – Unlock high growth potential through smart acquisitions

Ultimate Growth Strategies – A practical guide to engineer high growth into your business

Marketing for High Growth Ventures - Forget the spin, apply proven strategies

The Bessemer list was interesting to see:

https://www.bvp.com/portfolio/anti-portfolio

It's taken me a couple of days to try and digest what this list represents - from the consumer perspective, had no idea that so many of the big tech companies that have wound up changing the world as we know it all got help with funding to get to where they are now. So there's a whole network in place in Silicon Valley, of incubators with top talent innovators, and a sophisticated and experienced financial network there to assess the promise of the various start-ups to ensure an efficient/optimal deployment of capital? Maybe why so much of the world's innovation comes from the US - and maybe a lasting advantage too, that may lead to much of the world's innovation continuing to come from the US in the future?

(So hopefully US stocks will continue to do well in in the long-run, even if the market has a short-term crash? )

It's amazing how fast some of the more recent tech companies were able to scale - like AirBNB, Uber Tesla, Snap, Twitter ... many have become global household names before they've even started to turn a profit!


From the investor perspective, it seems like there must be so many companies with great ideas for how make things faster, cheaper, more convenient or more enjoyable - it's interesting to try and imagine how some of these ideas must have looked when they were first getting started, like Uber wanting to take on the taxi industry, etc?

From the start-up/innovator's perspective - it's interesting to hear how early on Google was in contact with the funding network. Maybe there's benefits to be had for the creative and entrepreneurially inclined, in getting to learn more about the Silicon Valley resources - like maybe learning more about what angel investors may tend to look for in investments may help give potential start-ups ideas of promising areas to focus on, and stuff like that?

Having already invested in a huge success is the biggest possible edge in venture capital. Winning leads to more winning. After a hugely successful exit, the next wave of founders will prefer investors that were involved in the big exit. These investors will have now have experience with hyper-growth, negotiating large exits, as well as connections to really important players in the industry. With the increased deal flow it is much easier to invest in next generation of great companies and the process repeats. This is why the best VC firms don’t change much over time. This is my biggest edge, but unfortunately for aspiring angels the hardest one to replicate.

It’s hard to have an edge over the best VC firms, but I do have one and it is size. It’s actually a much bigger edge than most people realize. I can put a meaningful amount of money to work over a group of seed or series A deals. A large VC firm might be in the same deals, but still have a billion dollars to deploy. It’s hard to find companies that can take that magnitude of money and still make venture-like returns.

There is definitely more to my edge, but it’s really hard to articulate. Hopefully, some of my other posts will shed more light on this.

Have kind of a fun story about the silicon valley start-up community having an edge in something else - have been seeing a lot of articles the last couple of years with people saying the Golden State Warriors are able to put together the best team in basketball because all the best players want to play there so they can learn about investing from the owners, and their network in silicon valley!

It kind of feels like there's a chance this might be a story you already know very well ranch99, but who knows - anyways, it seemed like kind of a fun one

Thanks again for this thread - it's been so interesting to hear about the start-up culture in silicon valley, have even started looking at some of the online resources about start-ups, and trying to come up with ideas, and stuff like that. And congrats on all your success! It must feel very rewarding to be able to help give people the chance to make their dreams and interesting ideas come true

Which private equity firms have you worked with? By worked with i mean tbey provided a funding round after you.

Do you invest in companies anyhwere in the country or world?