2 1/2 Angel Investing Mistakes You Can Easily Avoid
Part of successful angel investing is picking winners. Another part is avoiding picking losers. Before we founded Homebrew I made ~20 or so investments in startups using my own savings. I wasn’t necessarily trying to do anything impressive, just taking some risk capital and putting it towards people and products that struck me as compelling. All in all it worked out fine, driven primary by some fortunate acquisitions to companies like Microsoft, Pinterest and Facebook, the latter two in pre-IPO equity which grew substantially prior to their public listings. I never really tracked IRR or net returns, but I did pay close attention to ‘lessons learned.’ Here’s 2 (and a half) mistakes I made that you should avoid
Sin of Ego: Never make an investment as an angel believing that you can be the difference between a team succeeding and failing. A couple of times I encountered very likable first-time founders who were operating in an interesting problem space but lacked strong product instincts or experience. Should have passed and wished them luck, but instead an internal dialogue started. “Hunter, you’re a ‘product guy,’ just coach them up and you’ll have a huge winner on your hands.” Next thing I knew hands were being shaked and wire transfers sent. And the investment pretty much went to zero within 12–24 months.
As an angel investor you can certainly be helpful, and perhaps even de-risk a specific question or problem the founders face, but you aren’t on the org chart, aren’t spending enough reps to be the product manager of a product-led company. Your mileage may vary, but believing you’re the difference between a company succeeding and failing isn’t an investment thesis. Sure, if it’s a problem area that’s a personal mission for you and you want to spend a disproportionate amount of time trying to help them figure it out, go ahead, but know at that point you’re making an emotional, not financial, decision.
Sin of Enthusiasm: Summarized as “shut up and listen to the founders describe how *they’d* build the company/solve the problem.” You know when you really hit it off with someone and it’s just an amazing jam sesh? Like you’re just finishing each other’s sentences? Feels…