I got an interesting question from a well meaning person last week after the NYETM panel. Said person was a trader like myself and wanted to know how one could successfully transition to an active angel investor. Because I was pressed for time, I simply pointed him to the excellent Mark Suster posts on angel investing. It was a convenient brush off.
However it did not sit right. For one, Mark is not an angel investor, but a VC partner which colors his views. For another, there is a unique perspective when one goes from Wall Street to tech investing. On the surface, they look pretty similar and the transition should be seamless. In reality however, there is very little, if anything at all, that trading and tech investing have in common.
Before we begin however, it is important to review the three immutable laws of angel investing that applies to anyone getting into angel investing:
- If it looks like a sure bet, it isn’t
- Whatever you think you know, you don’t
- When things appear to be going well, they aren’t
So you still want to be an angel investor? Only if you are prepared to lose the entirety of your investment. However, if you have the stomach to absorb this bitter truth, then you probably have the right mix of ego, self-confidence, and foolishness to be an angel investor. You also probably have a lifetime’s supply of Tums and wear a moped helmet ironically.
While this sounds awfully fatalistic, angel investors can find success. As is the case with VC’s, being an active early stage tech investor means that you will invest in plenty of dogs before you find a winner or two. Even then the winners tend to take a long time to reach a profitable exit that hardly resembles the big, audacious IPO you might have envisioned when you wrote that first check. It is definitely not something you just dabble in or get into for a quick flip.
With this in mind, traders and other Wall Street pros transitioning to angel investing would do well to put the ego in check and the learning cap on. There are few arenas in life more humbling than technology startups, where 75% result in failure. When folks with long winning streaks run into this maelstrom of failure, you can expect turbulence. So here are some things to consider for those Wall Street denizens that are thinking about
- Markets Vs. People – Trading is a markets oriented business whereas venture is a people oriented business. By that I mean that trading is based on information from the markets being analyzed and traded. Venture depends heavily on people, their behaviors, and their ability to execute. Thus the analyses, models, strategies, risk assessments, and the like are completely divergent. As wild and unpredictable markets can be, trying to assess the prospects of a ragtag group of startup entrepreneurs with little more than an idea is even more risky and volatile. Therefore throw out the models, form a thesis to maintain a disciplined investment approach, and spend the time to get to know entrepreneurs well.
- Check That Attitude – Wall Street folks are rarely shy about their opinions on any topic. Having money and success can do that. However, swinging a big dick will not ingratiate you to others in the tech startup community, whether entrepreneurs or investors. Establishing quality deal flow is a critical factor in changing the odds towards a successful investment strategy. If you are a jerk, you can expect to see few quality deals and fewer entrepreneurs willing to talk with you except the most desperate. It is as much a reputation industry as any other industry, so dial down the attitude.
- Know Thy Industry – Domain plays a heavy role in being able to understand the technology ventures and markets one is evaluating. Many people coming out of the financial world do not have that background and thus are more reliant on gut feel and biases to base funding decisions on. Wall Street relies a lot on models these days, but gut feel still has its place when the data conflicts. However, many Wall Street hotshots are either following the lemmings via social proof or are merely shooting from the hip. You might as well throw darts at the dartboard in that case. Get educated in the technology and the markets you are investing in if you want to have long term success.
- More Than the Deal – People new to angel investing get very hung up on the deal terms, especially those from Wall Street. They want more control, more ownership, tighter restrictions, at less cost. Some of the term sheets drawn up by these folks would be considered usury in any other setting. I get the desire to want a good deal, that is why I work with the earliest of startup ventures before crazy Y Combinator like valuations get established. What Wall Street vets neglect to comprehend though is that angel investing is about helping the entrepreneur to succeed. Instead of crushing the entrepreneur, learn the trends in angel investing. Then you can put together a clean term sheets that are easy for others to sign and eliminates undue friction in later investment rounds.
- Control the Control Freak – The Wall Street crowd can be very Type A and incessantly hard driving. That is the nature of the beast. Thus, the biggest complaint I hear from entrepreneurs with Wall Street angel investors is that they are across the board overbearing. Some small level of ownership suddenly makes them entitled to act as if the startup is their own. The reason you would have invested in a startup to begin with is because you trust the team to be able to execute, but that is not what comes out when investors start meddling. Helping is good, barking orders like a Steve Jobs wannabe is not. Give entrepreneurs the space (and support) to fail and succeed on their own and be constructively critical when necessary.
Come to think about it, many of these suggestions could apply to a lot of people that are considering angel investing. Whatever the background however, there could be a lot more “angel” coming from those who profess to be angel investors. There are already too many bad actors around thinking early stage tech investing is some game. Remember, it is less about you and more about supporting entrepreneurs that deserve a leg up in the world.