"Investing is not a game where the guy with the 160 IQ beats the guy with a 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing."
I love this quote because it gets to the essence of investing. The best traders and investors I know realize three things:
Markets are an uncontrollable beast. Anyone that has tried to outsmart or outgun or outmaneuver the markets has usually been on the receiving end of a massive loss or a jail sentence. The investors that survive and win take the disciplined approach.
It is not too much of a stretch to apply these same lessons to startup investing. This is especially true with the current euphoria around tech startups. Everyone is watching the activity in the secondary markets, the massive billion dollar valuation funding rounds, and recent tech IPO’s. It gets people antsy and concerned. The nervousness is palpable. They are suffering an acute case of FOMO, or Fear Of Missing Out.
Before you go on a check writing spree, you need to stop, take a breather, and understand that you have no obligation to invest. While this is not necessarily true of VC’s which have their own investors to appease, for angel investors, the only obligation you have is to your own life priorities and investment philosophy. The number and types of startups you invest in, the amount you invest and the founders you choose to work with are all up to you.
All of this runs counter to the current startup market environment. Lightning fast funding rounds. social proof investing, and investor / founder speed dating are all part of the hysteria machine that kicks prudence and patience to the curb. While speed works to the advantage of entrepreneurs and of large institutional investors, it is the enemy of the angel investor. This is especially true of the funding pile ups that occur with mega hot startups attached to a who’s who of the investment community and presenting on stage at some top-tier incubator demo day. If you manage to get past the velvet rope, you are at an information disadvantage, you have built no relationship, and the terms are not favorable.
The best approach is to avoid the noise and work in your comfort zone. Develop an investment thesis around what and who you want to invest in. Determine how much you wish to invest. Then build up relationships with entrepreneurs that you can trust. The previous point is critical as you cannot short circuit or rush this process as Roger Ehrenberg wrote of a couple of weeks ago.
More importantly, realize that your time is not subject to anyone else’s timelines or schedules. This is not necessarily advice that entrepreneurs want to hear, but for investors, there is no benefits in rushing. Unless you feel absolutely comfortable with the founders and the concept and the deal, there is no sense in moving forward. To do otherwise is to be in the charity business which has nothing to do with investing.
The act of investing requires discipline. Simply writing checks because you like something is an emotional stimulus. Such behavior can be ascribed to the hits philosophy where if you take enough swings, you could hit a homerun. Why not, swinging a bat at high speed pitches is fun! Unfortunately, most never get that homerun while piling up all those strikeouts.
The slow and steady approach may not elicit great excitement and you will let some mega hits slip through. However, it is a strategy that is locked in on getting returns while helping entrepreneurs that need and deserve the assistance. That should be the win-win investing strategy that angel investors should be focused on.