Advice for your first year as an angel investor.

ANGEL INVESTOR

HOW TO BE AN

This presentation, and other free resources for angel investors,

is available at www.adviceforangels.com

Goal for this presentation: Pay it forward (many people helped me avoid early mistakes).

This is not investment advice.Consult a lawyer, accountant, or financial advisor before thinking about anything in this presentation.

• Advisor Advised BranchOut, Hired, + others

(2008-2012)

• Founding Team of

Involver (Acquired by Oracle, Summer 2012)

• Angel InvestorFirst investment in November 2012

EXPERIENCE

• Barbell Strategy Don't commit more than you can afford to lose.

• Large Portfolio Commit to doing many investments.

• Power-law returns Make sure every deal has large potential upside.

• Branding Know why a great entrepreneur would take your money over someone

else.

• Reputation Focus on improving your reputation at almost any cost.

SUMMARY

Before making any investment, know

what your goals are and what your plan

to achieve them is.

• Most of your money should be in very safe places,

a small percentage should be subject to large risk.

• You can not reasonably defend having >10% of your net

worth dedicated to angel investing

• Pick an amount you feel comfortable losing entirely and

budget that as your angel investment fund

• Assume these investments will take 10+ years to

become liquid (you can not sell your shares at will, you

have to wait for acquisition or IPO)

BARBELL STRATEGY

Read more about the Barbell Strategy

• These are highly risky investments, any of which could

easily go to zero

• Diversify across many (20-50+) good companies in order

to balance your risk

• Each of those companies must meet a high quality bar -

avoid any deal without very large potential upside.

Here’s a strategy for maintaining a high quality bar: look for high quality co-investors,

invest in companies where you know the space well, and have a high degree of

confidence that the team is going to execute and succeed.

• Don’t try to time the market, maintain a similar pace of

investments over several years

LARGE PORTFOLIO

A NOTE ON INVESTMENT

SIZE• AngelList has investments with minimums as low as $1k; most

serious seed startups have $10-25k minimums

• Early on, make the same size investment in each company

• This suggests that you need at least 20-40k of investment

capital set aside for Syndicates; and 400k-1m for direct

investment

• If possible, save 1-2x for follow-on (click the highlight for a

definition) — maintaining or growing your ownership in winners

is the best way to maximize returns

• Early on, follow on when a new, experienced investor leads a

new round in the company at a higher valuation

A NOTE ON INVESTMENT

SIZE

• Power-law returns aren’t intuitive — all of your gains will be

concentrated in a very small # of winners

• Three out of YC’s 717 companies make up 78% of

the portfolio's value

• A $10k seed investment in Uber would be worth

about $20 million dollars today

!Your job is to invest in the one or two deals that

will generate all of your returns.

FINDING THE BEST

DEALS• Try lots of sources of deal flow:

• Invest in areas you understand well or get help from people who

understand the area well

• Be aware that many of the best ideas look bad early-on:

• Consensus ideas are priced for low returns

• All good ideas initially look trivial or impossible

• Cold-call investors you know and ask for help, AngelList,

Startup Events, Accelerators, Demo Days

• Be curious about what companies are impacting

people’s lives, study what’s working and what’s missing

BE CONTRARIAN (AND

BE RIGHT)

INVESTING

WITH THE

CROWD

INVESTING

AGAINST THE

CROWD

SUCCESS

FULSTRATEGIES

Small Returns(the safe part of the barbell)

Big Returns(the risky part of the barbell)

UNSUCCE

SSFULSTRATEGIES

Small Losses Small Losses

ALL NEW IDEAS LOOK

BAD

ENTRPRENEUR HAS A

PSYCHOLOGICA

L INSIGHT

ENTRPRENEUR HAS A

TECHNICAL

INSIGHT

THAT INSIGHT IS

MEANIN

GFUL

Looks Trivial(until we all start using it)

Looks Impossible(until someone does it)

THAT INSIGHT IS

NOT

MEANIN

GFUL

Is Trivial Is Impossible(at least for this team)

Getting into deals:

brand and reputation.

BRAND

• Deals may be competitive — why would a founder take your

money over a different investor?

• Find ways to reliably add value (be an expert on a particular skill

and advise/help the team with that)

• Build your brand by sharing your insights freely (e.g. blog, tweet,

speak at conferences, help VCs, mentor at accelerators)

• The quality of the founders who cold call you for advice is a

good test of the quality of your brand

• Building a brand is easier in a niche (industry or location) —

develop an investment thesis

REPUTATION

• Your reputation dictates your access to competitive investments

• Illiquid investments are long commitments, founders want to

pick investors who will add the most value

• Invest in good companies and add value for your founders; they

will recommend you to others

• How you act when you’re going to lose money is a good

indicator of your reputation

Chris Dixon on developing a brand and reputation as an angel.

RECAP

• Have clear motives (have a goal, and a plan)

• Understand the implications of power-law returns:

• Add value; earn referrals from your portfolio executives

• Find one deal that will make the majority of

your gains

• Build a portfolio of many high-potential

investments

Advice from

Experienced Angels

PAUL GRAHAM

“That's how you win: by

investing in the right

startups. That is so much

more important than

anything else that I worry

I'm misleading you by even

talking about other things.”

Read this essay:

• How to be an Angel Investor

NAVAL RAVIKANT

“There has to be some reason

why people will take your

money instead of somebody

else’s. Otherwise at the end of

the day, you are commoditized

and you get bid out of the

game.”

Read this:

• How to be an Angel Investor, 2

• The rise of angels

SAM ALTMAN

“The real risk is missing out on that one outstanding

investment, not failing to get our money back on all

your other companies.”

“The best angel investors take bets on ideas/founders

that can be really huge and cheerfully lose your money

most of the time.”

“Invest in a reasonable number of companies […] bias

all your efforts towards attracting great founders.”

“Proprietary deal flow and networks are almost over,

you – and your references – are going to have to be

able to explain to a founder how you’re going to help

them.”

Read/Watch these:

• Sam Altman at PreMoney

• Upside Risk

• Venture Funds Fret as YC Soars

PETER THIEL

“There is only so much we can do to help the

companies in which we invest. And because

of this, the act of making the investment

(rather than the ability to fix things later)

remains by far the most important thing to

do.”

“[My biggest loss was not also investing in

the B round of Facebook,] whenever a tech

startup has a strong up round led by a top

tier investor, it is generally still undervalued.

The steeper the up round, the greater the

undervaluation.”

Read/Watch these:

• Zero to One (book)

• Peter Thiel AMA

• Tim Ferriss Podcast (go to 9:40 min)

CHRIS DIXON

“[Invest in good companies and

work your ass off. The next time

you’re competing for a deal, tell the

founder to call your prior

investments].

Think of it like a video game, where

you do this, and you level up. As

you level up, you can invest in

more companies and [can be more

helpful to them].”

Watch this:

• Chris Dixon on Brand Building

JOE LONSDALE

“You are betting on their drive /

determination to succeed. […]

Don’t bet on any team, or any

fund for that matter, that is not

obsessed and determined to

prevail.”

Read this:

• Angel Investing

BRAD FELD

“Understand the difference

between 0x and 100x: I’ve had two

of my angel investments return

over 100x each. Since I had a

strategy of investing the same

amount in each company, all I

needed was one 100x to allow me

to have 99 companies completely

flame out and return 0 and I’d still

break even.”

Read this:

• Suggestions for Angel

Investors

MARC ANDREESSEN

“4000 startups a year are founded … 15 of those

will generate 95% of all the economic returns”

“if you are doing it right, you are continuously

investing in things that are non-consensus at the

time of investment. And let me translate ‘non-

consensus': in sort of practical terms, it translates

to crazy.”

“We are looking for a magic combination of

courage and genius .… Courage [“not giving up

in the face of adversity”] is the one people can

learn.”

Read this:

• 12 things I learned from…

MAX LEVCHIN

“For HVF, cutting only ‘big’ checks

leads to more rigorous, more

exciting investments.

Removing the option of mitigating

risk by reducing check size means

the only way to discern between

investments is to thoroughly

understand [them].”

Read this:

• Big Checks

MORE COMING SOON…

I will update this deck with

new quotes frequently. I’ll

also post video interviews

and other resources on the

AdviceForAngels website.

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updates, interviews or

other resources:

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ANGEL INVESTING

LIBRARY

• How to be an angel investor

• Part 1 - Graham

• Part 2 - Ravikant

• Part 3 – Willis

• AdviceForAngels.com

• AngelList Investing Guidelines

• Zero to One (Thiel)

• Angel Investing 101 (Singh)

• Angel Investing (Lonsdale)

• Intro to Angel Investing (Teten)

• Black Swan Seed Rounds (Altman)

• Why angels lose money…

• Building an Angel Portfolio

• Ten Commandments of Angel

• Angel Investing

• Gust Videos (1, 2, 3, 4)

• Mark Suster (1, 2, 3, 4, 5)

• Angel Resource Institute

• Possible Insight (data driven angel analysis)

• AngelConf Videos (no longer available - does this exist anywhere?)

• Angel in Groups

• SecondMarket Guide to Angel Investing

• Startup Investing Trends

• Analyze Startups Like a VC

• Video: The Art of Angel Investing

• There is no angel bubble

• This Week in Startups with Naval Ravikant, Gil Penchina

• Unconventional Investing Rules (Kraus)

• Video: Becoming an Angel Investor (Conway and Maples)

• 25iq “Things I’ve Learned” series (Griffin)

• Angel Investing (book)