I made my first angel investment in 1994. At the time, I had no basis for evaluating whether I was investing in a good idea, understanding how the deal was structured or even what the market the company was addressing looked like. It just seemed like a cool thing to do – great founders and a killer co-investor in Brad Feld. As it turns out, that first investment, net.Genesis, was a big success. While I’d like to think that there is some correlation between my choosing net.Genesis for my first investment and its success, I don’t think there is much. Mostly, I was lucky.

After dipping my toe into the angel waters the first time, I continued to invest in more new companies. I made 1-2 investments every year for a while, always going in relatively big in my first round and picking up my pro-rata in at least the subsequent round. For the most part, I still didn’t know what I was doing, but I was beginning to get a feel for things. Since I was only doing a couple of deals each year, I started doing more due diligence, but even this was limited as I had a day job running my own company.

Some companies I invested in succeeded, more failed. For the most part, though, I was doing pretty well, making more money than I was losing and making way more than I could have in the stock market or any other investment instrument I had access to. Still, no one was going to question my amateur status. I was choosing companies to invest in from a very small sample of those looking for money, I didn’t understand the subtleties of deal terms (as I often co-invested with VCs, this lead to problems), and I was still investing in companies addressing markets I didn’t have even a basic understanding of (I’m talking to you, life sciences and healthcare).

Eventually, I got better at judging companies, teams, ideas and markets and being able to change a sea of gray into black and white, especially with respect to the market part. I increased my pace of investing to move up to 5-7 deals/year, but started investing less with each company and not always reinvesting my pro-rata amount in subsequent rounds that I thought were too expensive.

Fast forward to today. While I’m still an amateur, I’ve now done over 60 investments. Not as many as some, and not even close to semi-pro and professional angels. Still, a reasonable number. I finally feel that I have enough data to try to extrapolate some trends and, perhaps, associate some causes and effects. I’m still learning, of course, and since I haven’t made a profession out of it, I still don’t always hold fast to my own observations/guidelines. But, for what they’re worth, I share them here.

The General Stuff

• You need to put a reasonable amount of money in play especially at the beginning. Nothing pays out for a long time and the feedback loop is huge. A small percentage of investments will return anything, so you have to place a lot of bets.
• You need to look at many deals before choosing which ones to invest in. It’s easy to get excited about the ones you see, but you have to ask yourself what you’re not seeing. There are a million little companies out there to invest in. What are the odds that the subset you are seeing are the best ones?
• Network, network, network – get close to as many other angels as possible. The vast majority of angels are very open and are happy to share deals with you, make introductions or give advice.
• Look at every company from every incubator/accelerator you can find. Meet with the companies if you can. That’s not to say that there are good companies at all incubators, although there are usually one or two in each session, but there are many in one place and they’ll give you a perspective on what’s going on, team dynamics and what others are looking to invest in. They are also good practice for your own discovery skills. Like Malcolm Gladwell says in Outliers, you need to do it 10,000 times to build an instinctive foundation for knowing what has the best odds of working.
• As in most things, luck remains a significant factor in successful investment returns. When I think I’m getting good at investing, I remind myself to look back and ask myself if the company succeeded because of factors I had predicted, or because of something else. Most often, success is greatly determined by the company being at the intersection of the right place and the right time. Often, it got there because of macro-economic changes that were out of my view and out of my control. Sure, picking the right team in a solid market influences arriving at this intersection, still, there is a lot of luck involved.

What I’ve Learned and My Current Thinking

• Almost any deal with a good return will take a long time to reach a liquidation event – 6-10 years. While there are exceptions, my home runs all took about a decade to return their first dollar.
• I used to think I could put a small amount of money into many companies each year and things would play out. I no longer believe that to be true. It’s a hits business. Even with a high-multiple exit, a small investment won’t provide a large enough absolute return to cover losses from failed investments and make a lot of money. Now, I invest more in the first round I participate in and almost always do my pro rata in subsequent rounds to maximize my ownership as the company grows.
• I try to be somewhat valuation agnostic. That is, the math on successful companies (assuming my home run theory is correct), shows the valuation at which one invests really doesn’t matter much. I try not to overpay of course – if I can’t acquire enough of the company to give me a good return when a logical exit takes place, I’d rather put my money at work somewhere else.
• There are red flags (real or potential problems) in all deals. I try not to let the existence of one scare me away. It’s the combinations of red flags that matter. If the CEO does not want to take money for fear of being diluted AND won’t create a board of directors, for example, I walk away.
• I have two fundamental requirements for an investment – the team has to listen well (they don’t have to ever take my advice, but they have to listen to it and consider it), and founders have to have a desire to build a killer, well-rounded team. In my experience, founders who don’t actively listen don’t succeed. Those without solid teams struggle and most eventually fade away.
• Ideas are fleeting and are almost never unique. Even if the company seems to have a distinct cut at something, someone else with a similar idea will be smarter, faster and have more capital. Speed is the key variable. If the team is willing to work their asses off and take enough money so that they always have fuel in the tank, then they have given themselves the best chance to succeed. This latter part – money – is where I often find problems. Sometimes, founders don’t want to take money for fear of dilution. Because they don’t have enough money, they move more slowly and are overtaken in the market.
• I hate convertible notes, but after years of therapy, I accept that they are here to stay. Still, they are loaded with pitfalls and I try to avoid them when I can reasonably do so.
• I only invest in stuff I know, at least broadly. Of course, it’s not possible to know the entire spectrum of products, services and markets I want to invest in, but there are always some I have a better feel for than others. I have lost a ton of money in healthcare and life sciences. I’ve invested in the cure for cancer 3 times. It just goes to show that I have no idea how that stuff works.
• Does the company have a board? Every company should have a board. I find that often, when startups don’t have a board, it’s because they are worried about loss of control and put that worry ahead of the value that close advisors can bring to the company. This is a huge red flag for me (see above).
• I don’t invest in a round when I think the company will struggle to create a significant step up in valuation before they need more money. This can happen because the valuation on the current round is too high or the company is not taking enough money to make significant progress before the money runs out. I just wait until the next round to invest at pretty much the same valuation with reduced risk.
• There are many angel investors who seek out teams in the very early, formative stages of building their companies. As you’d expect, this type of investment offers the potential of lower valuations, a much greater return and, of course, failure. I am not one of these investors. I’m interested in the follow-up investment right after this nascent round if the company makes it that far. Much less risk and less work as well as I tend to follow and not lead, but my experience is that I usually have to invest at 2X the valuation.

There are some hugely successful, high-profile angels who can offer more wisdom and informed investment criteria than me. I fully suspect that some very successful angel investors may even disagree with me on one or more points. That said, for those of you who are just getting into angel investing or are looking for some perspective on how others do it, I hope that this is valuable. As always, I’d love to hear what you think.