With much love for my angel investors, angel investing is absolutely a mug's game.

If the company doesn't get off the ground (vast majority of investments) you lose all your money.

If the company does get off the ground, you are the lowest on the pref stack, and you have no ability to follow on to protect your position. You're not a contributing employee or meaningful future source of capital so your piece of the pie is just dead weight on the cap table. This means every single subsequent investor (and the founders, if they care more about money than their relationship with you) has an incentive to cram you down.

So net net the chances of success from passive angel investing are only slightly better than playing the lottery.

Best approach would be to make very few investments, where you're able to build a special relationship with the founder, and ideally get a board seat to defend your stake.

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Edit - to be clear, I don't think startups should be giving board seats to angel investors. It does happen in exceptional cases where the angel is uniquely valuable to the company, and those are the cases where the angel can defend themselves. But they are rare, which is why it's mainly a bad game to play.

I've heard variations on this sentiment repeated a lot. The exact message varies, but it's usually some variation of: early investors always lose, small investors always lose, and/or non-preferred shareholders always lose. I've seen and lived a small number of personal anecdotes that seem to back this up, and I'd like to better understand what underlying pathology causes this.

I understand that early investors are taking the most risk, and clearly there's a lot of downside. But what prevents them from being able to realize or capture the upside?

I've heard a theory, a few different times now, that bigger, later investors effectively collude (descriptive term, not value judgment) with founders to squeeze out early founders and employees (common shareholders) via unfair terms, such as excessive dilution (accepting too low a valuation for larger investment), excessive liquidation preferences (2x or more), etc., and then topping the founders up via side deals. I've heard that, by virtue of squeezing out passive participants, they're able to offer more to the founders, and that incentivizes the founders to take their deal over other alternatives. Does anyone know more specifics about how this happens? In particular, how is this not a breach of fiduciary duty to passive participants?

It's definitely possible to write anti-dilution clauses, etc. But, I've heard that more or less no one writes them, and more importantly no one accepts them. If this is a pretty well-known game, why haven't countermeasures become popular?

For my personal anecdote, I was once an early engineer - the first hire after their Series A - at a small startup that never found product-market fit. The economy was bad, and they were running out of money, and they took - as I understood it - a dubious Series B led by a dubious investor. The founders were very vague about the terms of the round. In particular, the founders revealed that the investors took liquidation preference, that it was greater than 1x, but absolutely refused to say how much. That always left a bad taste in my mouth. When I left, I didn't exercise my options. In the end, the company floundered, and is a zombie to this day. In that regard, I suppose that the particulars of that round don't really matter - none of us were seeing anything regardless.

I'd really appreciate if anyone closer to the money part of this industry could weigh in.

>Angel investors also face the longest time horizon for liquidity of any investor. Private equity aims for 3-5 year returns, and VCs typically run 7-10 year fund cycles, but angels usually wait 10+ years for exits. This means angels aren’t just taking company-specific risk, but also the risk of facing more macroeconomic cycles.

>Think about all that's happened since 2009 when I started: multiple presidential administrations, a global pandemic, zero interest rates, and now high inflation and higher interest rates. My investments have had to withstand all of these shifts, and many didn't make it through.

Really interesting stuff (for me, as an outsider).

Can anyone comment if VCs are looking for shorter fund cycles or are the macro economic shifts what's capping it at 10 years?

I once read one reason why startups take so long to IPO is so private investments can benefit longer from the growth

I always assumed angel investing (at least as it emerged originally) was essentially philanthropy with the motivation being it gave very rich people a way to nudge things they liked into existence and provided them with a semi-cheap way to keep their network fresh with young, hungry, interesting new people. Bonus it might very occasionally turn in to a lottery ticket (but that wasn't the primary driver of making the investment).

From chatgpt: “ In summary, Halle Tecco’s personal portfolio comprises about 34 direct investments, of which 24 have at least one female founder (as detailed above). This means roughly 70% of these companies were co-founded or founded by women. Notable female-founded companies in her portfolio include Everly Health (Julia Cheek), Cityblock Health (Dr. Toyin Ajayi), Kindbody (Gina Bartasi), Tia (Carolyn Witte/Felicity Yost), Hued (Kimberly Wilson), and many others listed in the first section. Halle Tecco’s investment focus has clearly encompassed a large number of startups with women on the founding team, aligning with her advocacy for female entrepreneurs in health tech ”

Call it charity or call it buying gal-pals with hubby’s money but primarily investing based on identity seems like a bad idea

Well, it says right there at the beginning:

    "Next week, I'll follow up with the cold, 
     hard data on my portfolio performance"

https://substack.com/home/post/p-162623790

I think there's just too much money chasing too few good businesses. Early days of tech boom with lots of opportunities is over. Any promising startups nowadays get crazy valuation very quickly, so stop making financial sense to invest in.

In a tale as old as time, the mega-rich get richer. It used to be that early stage VCs and angels could see tremendous upside for taking an early risk. It’s utterly unsurprising that giant VCs have found a way to cram them down once the startup is successful and realize all the upside.

Between this and giant PE coming downmarket, we should all just bootstrap and say “f off” to outside capital. With AI coding models, you don’t need that money to build anyway.

It’s hard for me to respond to these kinds of posts with anything other than a dismissive sentiment along the lines of “grats on being rich and playing your rich people sport. I’m sorry you don’t like your rich people sport anymore. Hope your next rich people sport is fun for you.”

>The post-ZIRP era (2023-2024) created headwinds

Post ZIRP is arguable the more normal situation, in which case one really has to ask...was it ever real

Might as well use the money to support your local shelter, less overhead and it actually does something good for a change.

Interesting that some people here are advocating for fewer investments and board seats when angel investing. It's rather the opposite: you need more investments and less time spent on companies.

Angle investors are vital to the startup community as they take a lot of risk and are able to fund ideas that sound too crazy to get regular funding. In this case though given a hit rate of let's say 1% for argument's sake, 54 investments in 15 years is too low. You need hundred of investments to make the math work. Also doing it for fun and to learn is laudable but in the end hitting an Uber or an Airbnb is all that matters. It sounds like the job became full time consulting which is great if you're wealthy and want to give back to the community but can become unsustainable otherwise.

Her follow-up with stats on her investments: https://substack.com/@halletecco/note/c-113855500

tl;dr: returned $0.31 on every dollar invested, albeit with a bunch of ongoing investments that may still pay off (but are unlikely to get her even on the investments let alone a profit)

SAFEs have also caused so many issues. They’re often poorly priced and can lead to legal issues or frustrations.

it's called "angel" investing because it's only one step removed from charity

Angel investor in the ZIRP era, quitting after a 10+ year bull market and never experiencing a market correction or downturn since 2008.

Maybe this one was just unlucky, lost money on the way and moved on.

The author seems to be unfamiliar with angelology. The image she uses for illustrating her article does not show an angel, but a statue of Nike, the Greek goddess of victory. Cf.: https://en.wikipedia.org/wiki/Nike_(mythology) -- Is there an involuntary deeper meaning in this?

So... angel investing was once a very small and rare thing. An investment class well outside the scope of formal financing channels. The "angel" was a relative of "silent partners," the informal early financiers of small businesses.

We can call YC the "turning point," nominally. Now we have an extremely mature web of financing channels. People with degrees specializing in the sector. Formal pipelines. Scale.

The key point is that these were investments "no one else is willing to make." Hence "angel." Mike Markkula wasn't competing for his deal with Apple. That changes everything.

Most startup investments made today would have happened whether or not any specific investor decides to do it. The market has liquidity.

An angel investor may also be eligible for a board seat, depending on their contribution to the venture. Factors such as introducing new customers, expanding into new markets and geographies, and driving growth in an industry with promising exponential potential can play a crucial role in securing this position.

An Investment Banker

Nb i actually really resent substack for sending me to the app. No; I don't want to pollute my history with this post, I just want to read it.

> Four others that raised money but with painful recapitalizations that effectively wiped out early shareholders

I don't get how this kind of stuff happens.

I live in Delaware, a chronically bad market for angel or seed funding. Of the funds that existed, I always thought they took the wrong track of seeking real returns and requiring way too much business validation. It should have just stayed as a way to help foster the local startup community with some potential upside.

> Just since 2023, I have had:

> One company that raised over $100M, with my shares at one point valued at over $1M on paper, acquired in a fire sale that returned zero to early investors

> Two others that were also “acquired” with some fanfare in the media, but returned nothing to early investors

> Four companies shut down after being unable to get to profitability or fundraise

> Four others that raised money but with painful recapitalizations that effectively wiped out early shareholders

TL;DR - Angel investing became too much like being an early employee at a startup always was, except it was actual money being lost instead of sweat equity.

If at one point your shares are worth 1% of the company (the 1M of 100M startup example), how does that get diluted to nothing on acquisition? I thought the whole point of the early stage investments were you were the first people to get the payout, not basically the last/never?

Oof, the amount of ways angels get squeezed out is kinda nuts, makes me way less excited about the whole early-stage game honestly - you think there's actually any way for small investors not to get hosed long-term or is that just the rules now?

Those with angel experience:

Do angels not get terms to "cash out" in secondaries/later rounds?

I was under the impression that some angels effectively acted as bridge financing to get to later rounds (in this case A/B/C) and to then exit if they wanted to?

>> One company needs you to help close a key hire >> Another is raising a bridge round and wants your input on the deck >> A third is struggling with a co-founder conflict and needs advice >> An investor calls asking you to vouch for a portfolio company they’re considering backing

This is the investor's perspective, but note all of these things consume a HUGE amount of time & energy from the founder(s) as well, and do nothing towards advancing your product or company. Good reminder how distracting outside funding can be - and this is AFTER you've gotten at least an angel round!

Angel investors should do a __post money fixed percent SAFE__ . Why invest if you dont spend the effort doing the payoff math? Just ask an LLM..

> Over the years, I’ve purchased stock in about a dozen companies on the Robinhood app. Some have tanked ... but unlike startups, none have gone to zero.

Close to 500 US listed public companies filed for bankruptcy during this period.

> Four others that raised money but with painful recapitalizations that effectively wiped out early shareholders. That last bullet was the nail in the coffin for me. For new investors to come in and wipe out early investors just because the market was in their favor was painful. It felt like opportunistic resets that enriched later investors at the expense of early supporters (not to mention early employees).

what? how does this happen exactly? i'm not aware of the normal mechanisms. are there not minority shareholder protections?

"I stopped angel investing because I was losing too much money"

> Private equity aims for 3-5 year returns

I honestly don't understand how private equity makes money at all. The playbook is:

1. Borrow a ton of money and buy a company on an LBO

2. Load up the company with debt, often complicated, exploding debt, to repay the original loan. Possibly sell off assets like real estate to pay off the original loan; and

3. Here's the kicker: sell off the company for a profit.

But we've seen time and time again that PE is a death sentence. Toys R Us, Red Lobster, numerous others. The company seemingly always explodes under the debt after the original snake oil salesman have cashed out. But my point is: who keeps falling for this and buying a PE hollowed out husk?

> Four others that raised money but with painful recapitalizations that effectively wiped out early shareholders

Does someone have a recommendation on reading that goes deeper on this point? What enables later investors to do this? What can early investors do to protect their investment?

Try to make some sense out of the OP. Start with some examples:

Google: As I recall, two guys in a garage, literally, until they had a good start on a good business, offered to sell out for $1 million.

Amazon: Bezos and a few programmers.

FedEx: I was there early on and saw a lot of stuff about the BOD (board of directors), Founder-CEO, executives, General Dynamics, visitors from big NYC banks, funding of the airplanes, deals with Memphis to get space on/near the airport, the worker bees, etc. Was close to the action, office next to the Founder--CEO F. Smith, reported to a Senior VP with office across the hall but really reported just to Smith, was close to the BOD ("you just keep doing what you are doing until someone tells you to stop"), twice in work for the BOD enabled crucial investment and literally saved the company, etc.

Plenty of Fish: One guy, three old Dell servers, Microsoft's .NET with ASP.NET and ADO.NET, on-line romantic introduction site, sold out for $575 million.

Compared with Plenty of Fish, how Google started, and the arithmetic in the post, a summary: For the invested money: (a) Too many big, powerful chiefs, and not enough working indians. (b) Big hats, too few cattle. Too much overhead for the work done, e.g., per line of code written and running.

So, one approach: Start cheap, dirt cheap. Sole, solo founder. Only an LLC and with lawyers and accountants like, say, a grass mowing business -- LITERALLY. Founder lives cheap, say, in an area with low cost of living, in a used manufactured house, that is also the office, old used car. Take advantage of the still exploding Internet and cheap, powerful tower case computers (assembled from parts) for development and servers, $60/month 1 Gbps Internet connection, etc. Find a market need can meet with this dirt cheap approach and can get to profitibility with rapidly growing revenue.

So, leave out the time, cost, botheration of: Investors, lawyers, accountants, rented high quality offices, investor meetings, Board meetings, a management tree, manager meetings, reports to investors and the BOD, 10+ employees with all the expenses, legalities, lots of plane travel, employee stock plans, vesting, etc.

For a while, tried to raise funding; time wasted. Lesson: In simple terms, most VCs won't look at a business idea or technology before there is rapidly growing revenue. Then nearly all the VC money is used for the lawyers, other overhead, etc.

Comparison: (A) Dirt cheap: Invest $50-K a year. (B) Angel, VC, private equity approach: $10+ million a year. Big difference.

Problem: Investors need the lawyers, accountants, and other overhead so go for approach (B) where %10- of the money goes for the real work of getting the business going.

Back to work!

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Ah yes angel investing. Investing in businesses that don't make money. Ok.

In my opinion, all companies that have some kind of "investor" always end up the same way: eventually, a paid sociopath is installed as CEO whose only goal is profit maximization. If the CEO were someone who valued noble ideals or principles above profit, the investors would quickly replace them with a more "optimal" person.

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