Why I'm An Angel Investor
People, learning, impact
The other day a friend asked me about angel investing. He told me that several entrepreneurs had invited him to invest, and he wasn't sure how to think about it. I thought it would be worth writing up a formal answer.
Angel investing generally refers to the process of investing money into an early stage private company. Sometimes the investment involves equity directly (e.g., I invest $25,000 for 1% of the stock of a company), and in other cases it is structured in a slightly more complex form like a SAFE. Angel investments are generally high-risk investments, and require that the investor has money that they are willing to lose. In most cases, companies will ask that all investors are accredited.
Though there are a few people who treat the label “angel investor” as a status symbol like “Tesla owner” or “person with a summer home in the mountains,” it can and should be a serious endeavor. It takes time, it requires sometimes saying “no” to entrepreneurs who are pouring their hearts into their businesses, and it obviously takes money. Though some early stage companies will take $5,000-$10,000 investments, most ask angel investors to invest at least $25,000-$50,0001.
I invested in a bunch of companies between 2012 and 2016, then slowed down significantly after starting Change Research in 2017. I plan to invest a little more in the years to come. Here are some of the reasons I’d recommend angel investing:
You get to work with amazing entrepreneurs. Angel investing gives a view into the work world of people who are, in many cases, both exceptional at what they do and driven to make their vision a reality. Being on a team with founders like that can be like being on the Bulls with Michael Jordan -- even if you're just the equipment person who shows up to practice a couple of times each season.
You learn about new domains. Being an angel gives you a window not just into a team, but into an industry and an organization. I've gotten ideas and approaches from company-building in one industry and then both applied them in my own companies and suggested them to other founders in different industries.
You can share whatever knowledge you have with founders in a high-leverage way (if they want it!). Though I haven’t provided meaningful help to most of the companies I've invested in, I've given my best advice, made intros, or helped problem solve with a handful of founders over the years in ways I’ve felt are additive. Where I've been able to help it's felt great.
You can put your thumb on the scale. I've tried to invest in companies that I think make the world a better place, and mostly succeeded. If you believe there are biases in who receives funding, by angel investing you can help to remedy them. As a bonus, you’ll be investing in people and companies that are undervalued, so they should produce higher returns!
You get to live vicariously through others. While I've personally found it unsatisfying to only live vicariously through others, I’ve found it rewarding and interesting to have a few hours each week taken up by someone else's joys and someone else's challenges. It also provides good perspective on my own problems.
Being an angel makes it easier to ask for money if you’re fundraising for your own startup. Having now been on the “other side of the table,” I know that investors are far from all-knowing sages. Though they may be gatekeepers, investors almost always know a lot less than entrepreneurs do!
I’ll add two warnings, because angel investing is not for everyone:
Please go into each investment knowing that, more likely than not, you will lose all of your money on this investment. There is a small chance your investment will return 10x and an even smaller chance it will return 100x or 1000x. But if it winds up being worth nothing, you should (assuming they didn’t defraud someone or commit crimes!) applaud the founder(s) for their efforts.
Please go in knowing that this is not your show to run. If you think the founders are pursuing a smart idea in a dumb way and you can be the force that points them in the direction that makes them successful, don’t invest. Instead, go find a company that’s doing exactly what you want (or go build it yourself).
Many of my angel investments have lost money, and I’ve been fine with that! The only times I’ve truly regretted an investment have been when I’ve felt misled by the founders. Fortunately, this has been quite rare; contrary to popular portrayals I believe most Silicon Valley founders are honest and have high levels of integrity.
I’m an advocate for personal financial simplicity in most circumstances; my wife and I are mostly invested in index funds. You should probably invest most of your money in index funds too! And, if you’re fortunate enough to have the time and financial resources to be an angel investor, I recommend it.
Founders usually impose minimum investment amounts because it is generally more work to raise $500K from 80 investors than to raise $500K from 10 investors. A very small percentage of investors may also be very high maintenance but low value add; if there are 80 investors on your cap table, it’s more likely one will fall into this category.