Notes - Angel - How to Invest in Technology Startups

October 23, 2024

Chapter 1: Someone Else Was Supposed to Write This Book

This chapter aims to teach you how massive wealth is created in the twenty-first century. The author, a self-proclaimed C-minus student from Brooklyn, aims to share his experiences and insights on how he achieved financial success in the tech industry.

The author acknowledges that while some people consider him lucky, others see him as a fraud or a hype man. However, he believes that his unique perspective as an outsider who succeeded makes his story valuable. He compares his journey to a classic tale of someone who starts from humble beginnings and rises to the top, highlighting the unexpected nature of his success.

The author argues that traditional business books focused on real estate or deal-making are outdated. Instead, he believes the key to wealth creation in the twenty-first century lies in technology, particularly in angel investing.

He acknowledges the potential risks associated with angel investing, comparing it to gambling, but highlights that it can also be a highly profitable endeavor. He reveals that he has achieved a fifteen-times return on his angel investments.

The author emphasizes that he plans to reveal his "unfair advantages" to help readers invest their money more intelligently. He asserts that angel investing in technology is the most efficient system for capital creation.

No Risk, No Reward

The author addresses the question of why not invest in companies that already have a proven track record. He argues that such companies have likely already gone public, making angel investing in early-stage startups the only way to tap into their potential for high returns.

He acknowledges the difficulty in valuing early-stage companies, where valuations are often speculative. He compares angel investing to a secret diamond mine, highlighting the opacity and potential profitability of this investment strategy.

The author advises readers who are seeking more predictable returns to consider low-fee index funds. However, for those willing to take on the risk, angel investing offers the potential for much higher returns.

He outlines the qualifications for accredited investors, including income and net worth requirements, and provides an example of how an accredited investor might approach angel investing.

The author explains the concept of share dilution and pro rata rights, illustrating how these factors can impact an investor's returns.

He highlights the potential returns from investing in "unicorns", startups valued at $1 billion or more, suggesting that a small investment in a unicorn could potentially yield millions of dollars.

He concludes by emphasizing the potential for both significant gains and losses in angel investing, urging readers to carefully consider their risk tolerance before proceeding.

Chapter 2: The Brooklyn Grinder

The author starts this chapter by asking: Is Angel Investing Gambling? He explains that the answer depends largely on how one approaches it. He describes his own approach as placing forty bets per year, hoping to win back more in aggregate than he's invested. He reveals his personal investment strategy: he's invested $10 million over six years and built a portfolio worth over $150 million, resulting in a fifteen-times return.

The author then uses a poker analogy to illustrate his advantage as an established angel investor. He claims that he starts "every hand of poker with the ace of spades," implying that his experience, network, and reputation give him a higher probability of success compared to novice investors.

He recounts a personal anecdote about his upbringing in Brooklyn, where he witnessed his family's financial struggles. This experience fueled his desire to understand wealth creation and led him to explore various systems before settling on angel investing in technology.

The Sequoia Scout Program’s Secret Origin

The author shares a significant milestone in his career: his role as the first "Scout" for Sequoia Capital, one of the most prestigious venture capital firms globally. This experience, featured on the front page of the Wall Street Journal, solidified his reputation as a successful angel investor.

He continues with his personal story, describing his financial struggles as a student and his relentless pursuit of understanding how people become wealthy. This quest led him to study various wealth creation systems and ultimately conclude that angel investing in technology is the most efficient path.

The author reiterates his commitment to sharing his knowledge and insights with readers, emphasizing the potential impact on society if more individuals become angel investors. He invites readers to join him in investing together, hinting at future chapters that will explain how to do so.

He emphasizes the importance of continuous learning and improvement, comparing angel investing to a poker game where understanding the dynamics and strategies of the game is crucial for success.

For the Real Outsiders

The author acknowledges that many aspiring investors may not have the financial resources to invest large sums of money. He assures them that later chapters will offer strategies and insights on how to leverage smaller amounts of capital effectively.

No Risk, No Reward

The author reiterates that investing in companies with proven track records is not a viable strategy for angel investors, as those companies have likely already gone public. He emphasizes that angel investors must embrace risk and invest in early-stage startups to capitalize on their potential for high returns.

He explains that as startups gain traction and generate revenue, their valuations become more predictable. However, in the early stages, when companies are still developing prototypes and establishing their business models, valuations are speculative and highly variable.

The author points out that as capital pools grow larger, finding attractive investment opportunities becomes increasingly challenging. He laments the opacity of angel investing, suggesting that successful investors are reluctant to share their strategies and insights.

He advises readers seeking predictable returns to consider low-fee index funds, noting that these offer a relatively safe way to double their money every seven to ten years. However, he contrasts this with the potential for much higher returns from angel investing, albeit with significantly greater risk.

The author provides a concise overview of the qualifications for accredited investors, including income and net worth requirements, according to the Securities and Exchange Commission (SEC).

He presents a hypothetical scenario to illustrate the potential gains from angel investing, outlining how an accredited investor with a net worth of $2.5 million could approach this investment strategy. He stresses that the lessons in the book will be valuable even for investors with smaller capital amounts.

The author revisits the concepts of share dilution and pro rata rights, explaining how these factors can significantly impact an investor's returns over time. He provides a detailed example, showing how an angel investor's stake could dilute to a fraction of its original value if they fail to exercise their pro rata rights.

He introduces the concept of "unicorns" - startups valued at $1 billion or more - and "decacorns" - companies worth $10 billion or more. He observes that a handful of unicorns emerge every year, with even fewer decacorns and even rarer $100 billion+ companies like Apple, Google, and Facebook.

The author highlights the potential for both significant gains and losses in angel investing, comparing it to a "casino" where the odds are heavily skewed in favor of investors. However, he cautions that investors must identify exceptional companies and dedicate significant time and effort to evaluating deals.

What’s the Downside?

The author acknowledges the challenges of finding exceptional startups to invest in, suggesting that investors may need to review thousands of companies to identify a handful of promising deals. This requires a significant commitment of time and effort, highlighting the demanding nature of angel investing.

He assures readers that subsequent chapters will provide guidance on sourcing deals, identifying promising founders, and evaluating investment opportunities.

Chapter 3: What Is Angel Investing?

Angel Investing 101

The author emphasizes that the core of angel investing lies in identifying startups that have the potential to generate outsized returns, typically aiming for those that could grow to a valuation of $1 billion or more.

He emphasizes that identifying such companies is a challenging endeavor, requiring a combination of intuition, experience, and a deep understanding of market trends.

To illustrate the potential rewards of successful angel investing, he shares a personal anecdote about his investment in Uber, which he considers the best investment he's ever made. He suggests that, while achieving a return of five thousand to ten thousand times one's investment is rare, consistent effort and a sound investment strategy can yield significant returns.

The author acknowledges that angel investing is a relatively opaque practice, with successful investors often reluctant to share their secrets. He contrasts this with more traditional investment approaches like low-fee index funds, which offer more predictable but modest returns.

Accredited Investors

He outlines the criteria for becoming an accredited investor, which includes:

These requirements are in place to ensure that investors in higher-risk ventures like startups have a certain level of financial sophistication and can withstand potential losses.

The author then uses an example of a hypothetical accredited investor with a net worth of $2.5 million to illustrate how they might approach angel investing.

Share Dilution and Pro Rata Rights

He delves further into the concepts of share dilution and pro rata rights, highlighting their crucial role in determining an investor's return.

Share dilution refers to the decrease in an investor's ownership percentage as a company issues more shares, typically in subsequent funding rounds. This can significantly impact an investor's overall return, even if the company's valuation increases.

Pro rata rights, on the other hand, grant an investor the right to maintain their ownership percentage by purchasing additional shares in subsequent funding rounds. This protects investors from excessive dilution and allows them to participate in the company's continued growth.

The author presents a hypothetical scenario where an angel investor's initial stake in a company worth $10 billion dilutes to a fraction of its original value due to their failure to exercise their pro rata rights. This emphasizes the importance of securing and utilizing pro rata rights to maximize potential returns.

Unicorns and Decacorns

He discusses the concept of "unicorns" - startups valued at $1 billion or more - and "decacorns" - companies worth $10 billion or more. He observes that a small number of unicorns emerge annually, with even fewer decacorns and rare instances of companies reaching valuations of $100 billion or more, citing examples like Apple, Google, and Facebook.

Risk and Reward

The author concludes the chapter by reiterating the inherent risks and rewards associated with angel investing. He compares it to a "casino" scenario where investors face the potential for both extraordinary gains and significant losses. He highlights the importance of diversification, due diligence, and a clear understanding of the risks involved.

He emphasizes that investors must be prepared to lose their entire investment, urging those with low-risk tolerance to consider alternative investment options.

He concludes by assuring readers that subsequent chapters will provide detailed guidance on sourcing deals, identifying promising founders, evaluating investment opportunities, and managing risk.

Chapter 4: Is Angel Investing for You?

Money, Time, Network, and Expertise

The author emphasizes that to be a successful angel investor, you need a combination of four key elements: money to invest, time to dedicate to evaluating deals and supporting founders, a network to leverage for introductions and insights, and expertise in a relevant field.

He highlights the importance of having enough capital to diversify your investments across multiple startups.

In addition to financial resources, time is another crucial factor. Angel investing is not a passive activity; it requires actively engaging with founders, attending meetings, and staying informed about industry trends. He advises that those who are not prepared to commit significant time should reconsider pursuing angel investing.

The author underscores the significance of a strong network in the startup ecosystem, suggesting that it can be as valuable as money. A network can provide access to promising investment opportunities, introductions to key industry players, and valuable insights from experienced investors.

Finally, expertise plays a critical role in an angel investor's success. While not essential, having specialized knowledge in areas like technology, marketing, or finance can give investors an edge in evaluating deals and advising founders.

He then highlights the role of advisors, who provide their expertise, network, and time in exchange for equity in the companies they advise.

Dealing with Wild Cards

The author outlines four essential qualities of successful angel investors:

He further emphasizes that enjoying interaction with diverse personalities is crucial for angel investors. They will encounter both brilliant, driven founders and those who are delusional and difficult to work with.

He concludes the chapter by emphasizing that while angel investing is not for everyone, those who possess the necessary qualities and are willing to put in the effort can find it a highly rewarding experience, both financially and intellectually.

Chapter 5: Do You Need to Be in Silicon Valley to Be a Great Angel Investor?

A Resounding Yes

The author delivers a straightforward answer to the question posed in the chapter title: Yes, you need to be in Silicon Valley to be a great angel investor.

Chapter 6: What’s So Special About Silicon Valley?

Silicon Valley Is the Center of the Universe

The author asserts that Silicon Valley stands as the epicenter of technological advancement and innovation, wielding a significant influence on various sectors such as media, transportation, advertising, healthcare, and hospitality.

He attributes this dominance to the unique concentration of talent, resources, and capital within the region, comprising cities like Mountain View (home to Google and LinkedIn), Palo Alto (Facebook), San Jose (eBay, PayPal, Cisco), Cupertino (Apple), and San Francisco (Twitter, Uber, Airbnb).

Decacorns and the Bay Area

The author strongly believes that decacorns (companies valued at $10 billion or more) are almost exclusively found in the Bay Area. He attributes this to the region's unparalleled ecosystem that fosters the growth of such high-value companies.

Life in the Fast Lane

The author compares angel investing in Silicon Valley to playing poker with an advantage. He argues that the concentration of successful companies and investors in the Bay Area provides a significant edge, increasing the likelihood of successful outcomes for angel investors.

He suggests that even less experienced investors can find success in Silicon Valley due to the sheer number of high-growth startups. Conversely, he notes that angel investors in other regions, like New York and Los Angeles, face greater challenges due to the limited number of quality investment opportunities.

Beyond Silicon Valley

While acknowledging the dominance of Silicon Valley, the author acknowledges other emerging tech hubs such as China, India, and Japan as potential areas for angel investing.

He notes that smaller markets like New York and Los Angeles offer the advantage of less competition, potentially leading to greater recognition for angel investors and a more manageable deal flow.

Thinking Big

The author encourages angel investors to adopt a bold mindset and focus on supporting founders with ambitious goals. He emphasizes that the potential rewards of backing groundbreaking ideas far outweigh the risks of failure.

He cautions against complacency and small-mindedness, arguing that aiming for incremental gains limits the potential for substantial returns. He stresses that embracing risk and supporting bold visions is crucial for achieving success in angel investing.

Chapter 7: Startup Funding Rounds Explained

Angel Rounds vs. Seed Rounds

The author addresses a common question among new angel investors regarding the distinction between angel rounds and seed rounds. He explains that the terminology surrounding startup funding can be confusing, with various terms often used interchangeably.

Funding Round Overview

He outlines the typical funding rounds a startup might go through, clarifying that not all companies experience every stage and most operate as "small businesses" without external funding from angels or venture capitalists.

Sweat Equity

The author defines sweat equity as the initial investment founders make in their businesses by working for free for extended periods. He considers it a crucial indicator of the founders' commitment and ability to create value without external capital. He emphasizes that demonstrating the ability to create value without funding is a strong positive signal to potential investors.

The author uses his experience bootstrapping his first business, Silicon Alley Reporter, as an example of a company built with sweat equity and resourcefulness.

He describes bootstrapping, using a historical analogy of pulling oneself up by one's bootstraps, as a way for founders to demonstrate their ability to create value with limited resources. He contends that founders who rely solely on external funding without first demonstrating their capacity for independent value creation may not be suitable investment candidates.

Friends and Family, Fools and Angels

After the initial sweat equity phase, many startups seek funding from friends and family, followed by "fools," who are early-stage investors willing to take on higher risk.

Angels typically come in later, looking for startups with some market validation.

The author compares angel investors to college scouts evaluating high school athletes. They seek to identify promising startups early on, recognizing that predicting success with absolute certainty is impossible.

He notes that certain factors, such as exceptional founders, desirable products, or attractive markets, may allow startups to bypass earlier stages and secure a seed round directly. He cites the example of well-designed on-demand apps in 2014-2015, which benefited from the hype surrounding Uber and Airbnb, allowing them to attract seed funding before even launching their products.

Series A Funding

The Series A funding round marks a significant milestone for a startup, often led by a professional venture capital (VC) firm that joins the company's board of directors. This signifies the establishment of formal governance structures, with a focus on increasing the company's share price.

Prior to Series A, founders typically operate with greater autonomy, concentrating on achieving product/market fit.

The introduction of a Series A and a board of directors means the CEO will dedicate a significant portion of their time to managing the board, preparing for meetings, and addressing legal and financial matters related to employee stock options.

The author notes that angel investors rarely participate in Series A rounds due to the dominance of VCs, who typically secure the majority of shares in these funding rounds. He suggests that angels might gain access to a Series A round if they have a strong relationship with the founders or offer significant value to the company.

He stresses the importance of pro rata rights for angel investors, which allow them to maintain their ownership percentage in subsequent funding rounds. He believes that granting pro rata rights is a sign of respect for early investors who supported the company at its inception.

Series B and Beyond

Following the Series A round, startups may progress through subsequent rounds of funding, denoted as Series B, C, D, and so on.

The author suggests that angel investors might consider selling a portion of their shares in secondary stock sales as the company matures and raises further funding rounds. He advises angels to consider exiting their investments strategically, referencing the adage, "By selling too early".

Chapter 8: How to Be an Angel Investor with Little or No Money

Cap Table Basics

An angel investor's primary objective is to secure a position on a company's cap table, which represents the ownership structure of the company. The cap table, short for capitalization table, is a comprehensive document outlining all shareholders, their respective ownership percentages, and the prices paid for their shares. It serves as a roadmap for understanding the distribution of equity within a company.

Five Ways to Get on a Cap Table

The author identifies five distinct categories of individuals typically found on a cap table: founders, employees, advisors, angel investors, and venture capitalists (VCs).

Shareholder Motivations

The author emphasizes that the primary motivation for all stakeholders on a cap table should be to maximize the value of the business.

Shares function as a scorecard, providing a clear and transparent representation of each individual's stake in the company's success.

He explains this concept using a hypothetical scenario. In a company with 50 million shares and a $5 million valuation, each share holds a value of 10 cents. If an angel investor owns 2% of the company (1 million shares), their stake would be worth $100,000. If the company reaches a $50 million valuation, the share price increases tenfold to $1, resulting in a $1 million return for the angel investor.

Secondary Sales

The author introduces the concept of secondary sales, where existing shareholders, including founders and early investors, sell a portion of their shares to other investors.

He explains how VCs sometimes purchase founder shares to provide a financial cushion for founders, enabling them to focus on the business without financial stress. This practice, often referred to as "idiot insurance," safeguards founders from personal financial ruin in case the venture fails.

The author cautions against providing founders with excessive financial security, suggesting that a moderate amount, enough to cover basic needs and reduce financial anxiety, is ideal. He argues that too much financial security can demotivate founders or lead to complacency.

He encourages angel investors to consider secondary sales as a strategic way to manage their portfolios and "dollar cost average" their returns, mitigating risk by diversifying their holdings and securing early profits.

Founding vs. Funding

The author explores two additional paths to acquiring equity in a company: founding or co-founding a startup and working for a company and vesting shares over time. However, he cautions that these paths limit individuals to a small number of opportunities over their careers, often leading to just one or two successful exits.

Skill, Network, and Knowledge

The author emphasizes the importance of leveraging skills, networks, and knowledge to become a successful angel investor or VC. He argues that simply having financial resources is not enough; individuals must actively contribute their expertise and connections to support the growth of their portfolio companies.

Chapter 9: The Pros and Cons of Advising

Five Types of Stakeholders in a Startup

There are five types of people involved in a startup company: founders, employees, advisors, angel investors, and VCs. Founders and employees work full-time to build the company and earn their shares by vesting over a four-year period. Angels and VCs buy their shares and typically only split their attention between the different companies in their portfolios.

Advisors: The "Broke Angels"

The author calls advisors "broke angels" because they trade their skills, time, connections, and reputation for shares in a company. Unlike founders and employees who are tied to a single company, advisors can work with multiple startups to diversify their risk.

The Risks of Advising

The author questions whether writing his book was the best use of his time. He worries that no one will read it and that he could have done something more productive with his time. He encourages readers to put his techniques to work and deliver massive returns so his time will be well spent.

The author then recounts a negative experience he had as an advisor to a startup. He worked with a founder named Alex and helped the company through some tough times. When the company secured funding, the founder and investors decided to remove the author from the cap table without giving him any shares. The author chose not to pursue legal action because he felt it wasn't worth the effort.

Syndicate Leads and Carry

The author transitions to discussing the role of syndicate leads on platforms like AngelList, SeedInvest, and FundersClub. Syndicate leads manage investments from a group of smaller investors and typically take a 15% carry, which is a share of the profits. The platform takes another 5% carry, so investors effectively pay a 20% fee for using these platforms. This is similar to the fee structure used by venture capital firms, with the exception of additional management fees.

Chapter 10: Going Straight from College to Angel Investing

"Pass On What You Have Learned."—Yoda

The author asserts that angel investing in technology is the most efficient system for capital creation. He believes it's important to share his knowledge and insights because having more people become angel investors will have a positive impact on society.

The author emphasizes that he will reveal all the advantages he's gained in the upcoming chapters so readers can invest more intelligently. He compares the process to a poker game, where the key to success is being a better player than everyone else at the table.

No Risk, No Reward

The author addresses the question of why investors shouldn't simply invest in established companies with proven track records. He points out that such companies have already achieved significant milestones, like product/market fit, revenue generation, and a large customer base, making them less risky investments but also limiting their potential for explosive growth.

Investing in Early-Stage Startups

He argues that early-stage startups, while riskier, offer the potential for substantial returns because they require capital from risk-taking angel investors. At this stage, the valuation of a company is often uncertain, as it's based on potential rather than established metrics.

The Appeal of Angel Investing

The author suggests that angel investing provides a unique opportunity for outsized returns, particularly for those with the time and expertise to identify promising startups. He acknowledges the lack of reliable data on angel investing returns but emphasizes its potential for significant profits, comparing it to a "secret diamond mine".

He contrasts this with the more conservative approach of investing in low-fee index funds, which offer predictable but modest returns. He recommends a service called Wealthfront, which allows investors to manage index fund investments efficiently.

Accredited Investors

The author highlights the SEC's definition of an accredited investor, which requires meeting specific income or net worth thresholds. He uses the example of an accredited investor with a net worth of $2.5 million to illustrate how someone might approach angel investing.

He explains the concept of dilution, where an investor's ownership percentage decreases as the company issues more shares to other investors. He also introduces the concept of pro rata rights, which allow investors to maintain their ownership percentage by investing additional funds in subsequent funding rounds.

Unicorns and Decacorns

He explains the terms unicorn and decacorn, referring to companies with valuations of $1 billion and $10 billion, respectively. He estimates that a dozen or so unicorns and a few decacorns emerge each year, highlighting their rarity and potential for massive returns.

He concludes by emphasizing the importance of due diligence and the need to identify exceptional founders to achieve success in angel investing. He provides a roadmap for the remaining chapters, outlining how he will guide readers through the process of identifying promising startups, evaluating founders, and making informed investment decisions.

Chapter 11: How to Hack Angel Investing: Syndicates

The Importance of Syndicates

The author introduces the concept of angel syndicates, arguing that they provide an effective way to gain experience and access to high-quality deals for new angel investors. He highlights the challenges of sourcing good deals, especially for beginners who may not have established networks or reputations in the startup ecosystem.

He recommends participating in ten small angel syndicates before venturing into direct investing. By doing so, he believes new angels can gain valuable experience, build relationships with successful investors, and demonstrate their value to founders, all for a relatively small investment of $25,000.

He emphasizes that angel investing requires a significant investment of time and effort, comparing it to a full-time job. He advises aspiring angels to dedicate twenty to thirty hours per week to evaluating startups and attending meetings.

What is an Angel Syndicate?

An angel syndicate is a group of accredited investors who pool their money together to invest in a single startup. The syndicate is typically led by an experienced angel investor who has a track record of successful investments. The syndicate lead is responsible for:

The Benefits of Syndicates

The author emphasizes several benefits of joining angel syndicates, particularly for new investors:

How Syndicates Work

The author provides an overview of how angel syndicates typically operate on platforms like AngelList:

  1. Individual angels sign up for a syndicate and make a non-binding commitment to invest a minimum amount per deal, typically $1,000 to $2,500.
  2. The syndicate lead shares a deal with members, providing a pitch deck, investment thesis, and other relevant information.
  3. Syndicate members evaluate the deal and decide whether to participate.
  4. If enough members commit, the syndicate lead invests in the startup on behalf of the group.

Minimizing Risk

The author advocates for a cautious approach to angel investing, recommending allocating only 15% of an individual's net worth to this high-risk asset class. He further suggests investing only 2% of that allocated amount in the initial ten syndicate deals, minimizing potential losses while gaining valuable experience.

He uses two scenarios to illustrate this approach:

Active Participation in Syndicates

The author encourages syndicate members to be active participants, not passive observers. He suggests several ways to engage with portfolio companies:

Writing Deal Memos

He stresses the importance of writing deal memos for each investment, even when participating in a syndicate. These memos should outline the reasons for investing, potential risks, and key factors for success. He advises reviewing these memos regularly to track the company's progress and assess the accuracy of initial assumptions.

Learning by Doing

The author compares participating in angel syndicates to training in the Jedi arts on Dagobah, a safe environment to learn from masters without significant risk. He encourages new angels to embrace this learning opportunity, ask questions, engage with founders, and refine their skills before venturing into independent angel investing.

He concludes by highlighting his own evolution as an angel investor and the value of the network and platform he's built over two decades. He encourages readers to strive for excellence and surpass his achievements, acknowledging that "records are made to be broken."

Chapter 12: Month One: Your First Ten Syndicate Deals

Selecting Syndicate Deals

The author reiterates the importance of angel syndicates for new investors, emphasizing their value as a learning tool and a means of building a portfolio with lower risk. He references platforms like AngelList, SeedInvest, and Funders Club where dozens of startups are syndicated each month.

He advises investing in fifty Silicon Valley startups over three years, translating to one or two investments per month, to increase the chances of achieving outsized returns. He recommends allocating $1.5 million across these deals, averaging $30,000 per startup. He suggests a strategy of investing $1 million across the first forty-five deals and allocating an extra $100,000 to each of the top five performers to maximize potential gains.

Identifying "Dragon Eggs"

He uses the term "dragon" to describe an investment that returns the entire initial capital. He emphasizes the goal of finding promising startups, or "dragon eggs," that have the potential to generate such significant returns.

He reiterates his recommendation of limiting angel investing to 15% of an individual's net worth, further suggesting allocating only 2% of that amount, or $25,000, to the initial ten syndicate investments. He revisits the two scenarios presented in Chapter 11 to illustrate the minimal impact of potential losses within this framework.

Active Participation

The author emphasizes the importance of active participation in syndicates, even though control is ultimately ceded to the syndicate lead. He encourages investors to engage with portfolio companies by retweeting news, making introductions, providing advice, and generally acting as if they were directly invested in the company. He frames angel investing as a competition, encouraging investors to strive to provide more value than any other angel involved.

Writing Deal Memos and Meeting Founders

The author again stresses the value of writing deal memos for each investment, outlining the rationale, perceived risks, and key success factors. He advises reviewing these memos periodically to assess progress and the accuracy of initial assumptions.

He recommends meeting in person with the founders, even when investing through a syndicate, to gain a firsthand understanding of the company culture and leadership style. He recounts a missed opportunity with Twitter, highlighting how his biases and assumptions prevented him from recognizing its potential.

Building a Network

He transitions to the second month of an angel investor's journey, focusing on building a network and sourcing "proprietary deal flow," which refers to deals not publicly available on platforms or at demo days.

He outlines a strategy for establishing a network within Silicon Valley, advising investors to:

  1. Identify twelve target angels with diverse portfolios and areas of expertise.
  2. Research these angels, noting their backgrounds, interests, and investment styles.
  3. Attend events where these angels are present, observing their interactions and identifying opportunities to connect.
  4. Connect on social media and send personalized messages expressing interest in their work and offering value.
  5. Request a meeting to discuss their investment philosophies and learn about potential deal flow opportunities.

Building Social Currency

He emphasizes the importance of "social currency" in Silicon Valley, which he defines as the value derived from relationships and connections. He advises investors to build this currency by:

Connecting with Top Investors

He provides a template for emailing top investors encountered through this process:

Sourcing Proprietary Deal Flow

He then provides two email templates for sourcing proprietary deal flow from the network of twelve angels established in the previous steps. These templates emphasize expressing genuine interest in the angel's portfolio companies, demonstrating a deep understanding of their vision, and offering specific ways to add value:

Template 1:

Template 2:

He emphasizes the importance of sincerity, passion, and a demonstrated willingness to add value when approaching potential investors.

Evaluating Opportunities and Saying No

The author advises investors to be methodical when evaluating direct deal opportunities, contrasting this approach with the streamlined process of joining syndicates. He recommends using a spreadsheet to track potential investments, rating each company as "Great," "Good," or "Okay."

He suggests documenting the reasons for passing on investments to gain insights into decision-making patterns and improve future evaluation skills. He advises scheduling recurring reminders to revisit these notes and track the progress of companies that were not selected, providing valuable data for future forecasting.

Resisting Artificial Deadlines

He cautions against succumbing to artificial deadlines and manufactured scarcity often employed by startups, particularly those associated with accelerators like Y Combinator and 500 Startups. He shares an anecdote about a company that presented a term sheet before a meeting, demonstrating the manipulative tactics sometimes used to pressure investors.

Moving Forward

He concludes by emphasizing the importance of a methodical approach when evaluating direct deals, contrasting this with the streamlined process of joining syndicates. He encourages readers to continue engaging with the material and the process, promising that they will be prepared to make their first direct investment after completing the next eleven chapters.

He concludes with a motivational message, emphasizing the potential for any reader to achieve significant returns and reiterating his core message: "Do the work."

Chapter 13 Month Two: Thirty Days of Angel and Founder Meetings

Building Social Currency

Having invested in ten syndicates and met twelve angel investors in the first month, the second month of the author's recommended process focuses on meeting with founders. He explains the importance of building what he calls "social currency." He defines this as the value derived from the relationships and connections one cultivates within a particular community, in this case, the Silicon Valley startup ecosystem.

He emphasizes that meeting with twenty-five founders in a month significantly enhances one's social currency within this ecosystem. He suggests that by engaging in this process, individuals gain recognition and credibility, becoming more deeply integrated into the community and gaining access to valuable insights and opportunities. He describes how this process can position individuals as "insiders," affording them a greater understanding of market trends and a more nuanced perspective on investment opportunities.

Emailing Your Network

The author outlines specific steps for maximizing the value of these founder meetings, suggesting investors email their network of angel investors to request introductions to founders in their portfolios. He provides two email templates, both emphasizing the importance of expressing genuine interest in the angel's portfolio companies and demonstrating a deep understanding of their vision.

Email Template 1

This template focuses on passion and a demonstrated willingness to add value:

He emphasizes that this approach, which demonstrates a deep understanding of the company and a willingness to contribute meaningfully, is more likely to result in an introduction than a generic request.

Email Template 2

The second template is more direct and straightforward:

This approach, while less elaborate, can be equally effective, particularly when targeted at investors known for their openness to connecting with new angels.

Evaluating Opportunities and Saying No

The author stresses the importance of saying no to most investment opportunities, particularly during this early stage. He advises investors to be methodical in their evaluation, resisting the pressure to make quick decisions. He recommends employing a structured approach, outlining a process for evaluating and ranking potential investments.

He suggests using a spreadsheet to track each company encountered, assigning a rating of "Great," "Good," or "Okay." He advises writing concise explanations for each rating, particularly noting the reasons for passing on investments, as a means of developing a deeper understanding of one's investment criteria and improving future evaluation skills.

Building a "No" Spreadsheet

He recommends creating a "No" spreadsheet, detailing the reasons for declining each investment opportunity, as a valuable tool for reflecting on past decisions and refining future assessments. He suggests adding columns to track follow-up meetings, due diligence notes, and the progress of companies that were not selected, creating a comprehensive database for analyzing investment patterns and improving decision-making over time.

Resisting Artificial Deadlines

The author again cautions against artificial deadlines and manufactured scarcity, particularly common among startups associated with accelerators like Y Combinator and 500 Startups. He encourages investors to maintain a methodical approach, resisting the pressure to make hasty decisions based on fabricated timelines.

He shares an anecdote about a company that presented a term sheet before a meeting, illustrating the manipulative tactics some startups employ to pressure investors into making quick commitments. He reemphasizes the importance of resisting these pressures and adhering to a disciplined evaluation process. He encourages a measured approach, urging investors to prioritize careful consideration over impulsive reactions.

Chapter 14 My Best and Worst Pitch Meetings

The Importance of Professionalism

The author emphasizes the importance of professionalism and respect in pitch meetings. He uses an analogy, comparing pitch meetings to the experience of working on a volunteer ambulance. He explains how the initial excitement and sense of purpose can wane with repetition, leading to potentially negative habits like indifference, lack of focus, and even cynicism.

He draws a parallel to pitch meetings, cautioning against developing a sense of boredom or detachment. He reminds investors that founders meticulously prepare for these meetings, often traveling long distances and taking time away from building their businesses. He highlights the importance of treating each pitch meeting as a unique and significant event, stressing that even if an investor might not ultimately invest, the meeting itself holds value for both parties.

He cautions against displaying negative behaviors like checking one's phone or cutting meetings short, reminding investors that these actions can negatively impact their reputation within the tight-knit startup community. He reminds readers that founders share their experiences with one another, emphasizing that reputation is paramount in this environment. He stresses that demonstrating professionalism, respect, and attentiveness can lead to a positive reputation, enhancing an investor's appeal to potential founders.

Convincing Founders to Accept Your Investment

He emphasizes that securing funding is not the primary challenge for great founders. He highlights the abundance of capital available in Silicon Valley, arguing that exceptional founders have numerous options for financing their ventures.

He emphasizes the importance of creating a positive impression during the pitch meeting, arguing that a founder's feelings and perceptions stemming from the interaction can significantly influence their decision about accepting an investment. He suggests that investors should prioritize creating a welcoming and supportive environment, demonstrating genuine interest and a commitment to helping the founder succeed. He contends that investors should strive to leave founders with a positive and lasting impression, making them eager to partner and build a successful venture together.

Viewing Pitch Meetings as a Competition

The author encourages readers to approach pitch meetings with a competitive mindset. He suggests that investors should view the interaction as a competition to win over the founder, highlighting the importance of exceeding expectations and demonstrating greater value than other potential investors.

He criticizes investors who underestimate the importance of pitch meetings, attributing this complacency to a false sense of power stemming from their financial resources. He asserts that this misconception leads to a lack of effort and a diminished ability to connect with promising founders. He reminds investors that the true challenge lies in convincing exceptional founders to accept their investment, not simply writing checks. He emphasizes the importance of actively engaging in pitch meetings, demonstrating a genuine desire to partner and contribute to the founder's success.

Chapter 15 What to Do Before a Pitch Meeting

Thorough Preparation Is Key

The author emphasizes the importance of extensive research and preparation before meeting with founders. He argues that merely scheduling meetings is insufficient, stressing the need for a proactive approach that involves gathering information, analyzing data, and forming an initial assessment of the founder and their business.

He advises investors to avoid scheduling meetings solely based on a founder's fame or insistence on an in-person meeting. He suggests these factors might indicate a lack of focus on essential business elements. He contends that requesting detailed information prior to an in-person meeting demonstrates a discerning approach, signaling to founders that an investor values their time and is serious about evaluating the opportunity.

Prioritizing Scalable Businesses

The author reiterates his belief in the importance of focusing on businesses with high scalability in the technology sector. He contrasts these ventures with traditional businesses like independent films, restaurants, and consulting firms, which, while potentially successful, typically lack the exponential growth potential of technology startups.

He argues that investing in technology startups offers a more efficient path to wealth creation, given their potential for rapid expansion and significant returns within a shorter timeframe. He draws a comparison between businesses built on physical assets (“atoms”) and those built on digital information (“bits”), emphasizing the superior scalability of software-based businesses.

He illustrates this point with the example of Starbucks, a successful company that required decades and thousands of physical stores to reach a billion customers, contrasting it with Facebook, which achieved this milestone within a significantly shorter timeframe through its software platform.

Focusing on Exceptional Founders

The author emphasizes the importance of identifying exceptional founders rather than simply focusing on promising ideas or markets. He argues that while market trends and product concepts are important factors, the quality of the founder is paramount. He contends that exceptional founders possess the vision, adaptability, and resilience to navigate the challenges of building a successful business, even if their initial idea or market focus evolves over time.

He asserts that while anyone can generate a compelling idea, executing that idea successfully requires a unique set of skills and attributes that are inherent to exceptional founders. He believes that by identifying and backing these individuals, investors increase their chances of achieving significant returns, regardless of the specific market or product.

He uses the analogy of Facebook, arguing that while the concept of a social network existed before Facebook, Mark Zuckerberg's exceptional abilities as a founder enabled him to execute the idea on a grand scale, transforming it into a global phenomenon. He contends that Zuckerberg's unwavering commitment to product improvement, growth, and execution set him apart, enabling him to overcome challenges and achieve unparalleled success. He reinforces his view that identifying exceptional founders is the key to successful angel investing, arguing that these individuals are the driving force behind truly transformative companies.

Chapter 16 What to Do During a Pitch Meeting

Dedicating Ample Time

The author advises investors to dedicate a full hour to in-person meetings with founders, emphasizing that this demonstrates a commitment to understanding the business thoroughly. He suggests that this extended timeframe allows founders to articulate their vision comprehensively without feeling rushed, fostering a more productive and insightful conversation.

He explains that a longer meeting makes little difference in the overall time invested in evaluating a startup, given the additional hours spent on research and communication outside the meeting itself. He highlights that a holistic approach to time management necessitates a significant investment of time beyond the initial meeting.

He personally extends meetings beyond an hour if needed, providing ample space for founders to elaborate on their ideas and answer questions in depth. He encourages investors to prioritize active listening and allow founders to drive the conversation, creating a more collaborative and respectful atmosphere.

Demonstrating Focused Attention

The author stresses the importance of giving founders undivided attention during pitch meetings. He advises investors to silence their phones and avoid distractions, emphasizing that these actions convey respect and demonstrate a genuine interest in the founder's presentation.

He criticizes investors who exhibit unprofessional behaviors like checking their phones or multitasking during meetings, arguing that these actions undermine the founder's efforts and create a negative impression. He recounts an anecdote involving Dave McClure, a well-known investor, who displayed distracting behaviors during a pitch meeting, contrasting this with his own approach, which emphasizes focus and attentiveness.

He highlights the importance of differentiating oneself from other investors by demonstrating professionalism and respect, arguing that this can enhance an investor's appeal to founders seeking supportive and engaged partners.

Taking Notes Effectively

The author advocates for taking notes using pen and paper during pitch meetings, asserting that this traditional method signals seriousness and respect to founders. He discourages the use of laptops, tablets, or smartphones for note-taking, arguing that these devices can create a barrier between the investor and founder, hindering genuine connection and engagement.

He suggests that taking notes by hand demonstrates a commitment to capturing and retaining information effectively, conveying a sense of value and importance to the founder's presentation. He believes that this practice reinforces an investor's image as a thoughtful and engaged participant in the meeting.

Creating a Professional Meeting Environment

The author emphasizes the importance of conducting meetings in a professional setting, suggesting that a dedicated conference room is preferable to a casual cafe environment. He believes that a formal setting conveys a sense of seriousness and importance to founders, reinforcing an investor's commitment to the process.

He describes his personal attention to detail in preparing conference rooms for meetings, ensuring a comfortable and conducive environment for productive conversations. He shares his appreciation for the well-appointed meeting spaces of successful individuals like Barry Diller and Allen & Company, highlighting their attention to detail and the positive impression it creates.

He emphasizes that while a professional setting might not be essential for every meeting, it demonstrates a level of respect and consideration that can set investors apart, particularly when dealing with discerning founders.

Adopting a Conversational Approach to Questions

The author encourages investors to adopt a more conversational approach when asking questions during pitch meetings, suggesting that this fosters a more natural and insightful exchange of information. He emphasizes the importance of listening attentively to founders' responses, allowing their answers to guide the flow of the conversation organically.

He argues that relying solely on a predetermined list of questions can limit the depth and breadth of the discussion, potentially missing valuable insights that emerge spontaneously. He advocates for a more flexible and responsive approach, allowing the conversation to evolve naturally based on the founder's insights and perspectives.

He shares his experience of using minimal verbal cues during podcast interviews, prompting subjects to elaborate on their thoughts and experiences without interruption, highlighting the effectiveness of this technique in eliciting valuable information. He encourages investors to practice active listening and thoughtful questioning to maximize the value of their interactions with founders.

Chapter 17 How to Pick a Billion-Dollar Founder

The Importance of the Founder

The author emphasizes that identifying billion-dollar founders is the key to successful angel investing, rather than simply trying to pick billion-dollar companies or ideas. He believes that truly exceptional founders possess a unique set of qualities that enable them to build and scale transformative businesses, regardless of the specific market or product they pursue.

Effective Deal Flow Management

The author outlines the three essential steps involved in managing a successful deal funnel for angel investors:

He acknowledges that in the early stages of a startup's life cycle, there is often limited data available to make investment decisions, and therefore investors must rely heavily on their judgment and intuition when evaluating founders.

Filtering for Scalability and Traction

The author advocates for focusing on startups that demonstrate traction, meaning evidence of user engagement and market validation. He advises investors to prioritize companies that have a product in the market and are generating revenue, as this provides a more concrete basis for evaluating their potential.

He discourages investing in pre-traction startups, arguing that this introduces unnecessary risk, particularly for new angel investors. He emphasizes the importance of managing time efficiently and focusing on opportunities with a higher probability of success. He reiterates his belief in the superior scalability of technology startups, arguing that these businesses offer a more efficient path to wealth creation compared to traditional businesses that rely on physical assets and slower growth trajectories.

Identifying Exceptional Founders: Key Traits

The author highlights several key traits that he believes are indicative of billion-dollar founders:

He emphasizes the importance of evaluating founders as individuals, rather than solely focusing on their ideas or market opportunities. He suggests asking oneself, "Would I buy stock in this person if I could?" arguing that exceptional founders are intrinsically valuable assets who can drive success regardless of the specific business they pursue.

He draws a parallel between exceptional founders and successful athletes, arguing that both possess a rare combination of talent, dedication, and mental fortitude that enable them to achieve extraordinary results. He cites Mark Zuckerberg as a prime example of a billion-dollar founder, attributing Facebook's success to Zuckerberg's exceptional vision, execution, and adaptability. He contrasts Zuckerberg's approach with founders who merely copy existing features or chase market trends, arguing that these individuals lack the originality and ambition to build truly transformative companies.

The Importance of "Why Now?"

The author stresses the significance of understanding "Why now?" when evaluating startup opportunities. He believes that successful founders often identify unique market timing opportunities, recognizing emerging trends or shifts in consumer behavior that create favorable conditions for their businesses.

He argues that "Why now?" insights can provide a competitive advantage, enabling founders to capitalize on emerging opportunities before others recognize their potential. He cites his own experience founding Weblogs, Inc., highlighting his recognition of the growing demand for online content and his belief that bloggers could produce more engaging and timely content than traditional journalists.

He contends that understanding "Why now?" is crucial for discerning investors, as it helps to differentiate truly innovative startups from those that are merely chasing existing trends or copying established players.

Chapter 18 The Four Founder Questions

The Importance of Founder Meetings

The author emphasizes the critical role of in-person meetings with founders in the angel investing process. While some investors rely primarily on tracking the investments of other successful angels, the author believes that direct interaction with founders is crucial for gaining a deeper understanding of their motivations, capabilities, and vision.

He compares these meetings to a series of "first dates," highlighting the importance of building rapport and trust with founders to make informed investment decisions. He stresses that these meetings should be viewed as opportunities to gather information, assess the founder's character, and evaluate the potential of the business.

The Four Key Investor Questions

The author identifies four critical questions that investors should aim to answer during these meetings:

  1. Why has this founder chosen this business? Understanding the founder's personal connection to the problem they are solving is essential for gauging their passion, commitment, and long-term vision.

  2. How committed is this founder? Assessing the founder's level of dedication, resilience, and willingness to make sacrifices is crucial for determining their ability to navigate the challenges of building a successful startup.

  3. What are this founder's chances of succeeding in this business—and in life? Evaluating the founder's overall competence, resourcefulness, and ability to learn and adapt is critical for predicting their long-term success.

  4. What does winning look like in terms of revenue and my return? Understanding the founder's financial projections, growth strategy, and exit plan is essential for assessing the potential return on investment.

The Art of Asking Questions

The author advises investors to adopt a "Columbo" approach when interviewing founders, emulating the inquisitive and unassuming demeanor of the famous TV detective. He suggests asking concise, open-ended questions and listening intently to the founder's responses, focusing on understanding their perspective and motivations rather than trying to impress them with their own knowledge or experience.

He emphasizes the importance of active listening, non-verbal cues, and a genuine curiosity about the founder's journey. He cautions against interrupting, dominating the conversation, or showing off, as these behaviors can alienate founders and hinder the development of a trusting relationship.

The Four Key Founder Questions

The author shares four specific questions that he asks every founder, designed to elicit insightful responses and help him answer the four key investor questions outlined earlier:

  1. What are you working on? This open-ended question allows founders to describe their business in their own words, revealing their passion, clarity of thought, and ability to articulate their vision concisely.

  2. Why are you building this? This question probes the founder's personal motivations, helping to uncover their connection to the problem they are solving and their belief in the potential impact of their solution.

  3. Why now? This question explores the founder's understanding of market timing, revealing their insights into emerging trends, shifts in consumer behavior, or technological advancements that create favorable conditions for their business.

  4. How big can this get? This question assesses the founder's ambition, market understanding, and ability to envision the long-term potential of their business. It helps to gauge their realism, growth strategy, and exit plan.

The Importance of Concise Communication

The author advocates for clear, concise communication in all interactions with founders, emphasizing the value of respecting their time and focusing on the most important information. He encourages investors to ask short, direct questions and listen intently to the founder's responses, allowing them to fully articulate their thoughts and ideas without interruption.

He emphasizes the importance of non-verbal communication, suggesting that investors maintain eye contact, take notes diligently, and avoid distractions like checking their phones or laptops. He believes that these actions demonstrate respect, attentiveness, and a genuine interest in the founder's perspective.

Evaluating Founder Responses

The author provides guidance on interpreting founder responses, highlighting key indicators of strong and weak answers. He suggests paying attention to the founder's:

He cautions against investing in founders who:

Chapter 19 Going Deeper

Building on the Foundation

The sources explain that this chapter builds upon the four fundamental founder questions discussed in Chapter 18. The first half of an hour-long meeting with a founder should be dedicated to understanding their "why" – why they're building this business, at this time, with this vision. The second half of the meeting involves going deeper, asking more tactical questions to assess their execution plan and personal commitment.

The Importance of Note-Taking and Active Listening

The sources emphasize the importance of taking detailed notes during founder meetings. The act of writing down information, instead of relying on a laptop or tablet, enhances focus, memory, and critical thinking. It also demonstrates respect and attentiveness to the founder.

While listening, investors should focus on absorbing information and making connections. They should note down any unfamiliar terms, acronyms, or concepts to clarify later in the conversation, demonstrating a commitment to learning and a thorough understanding of the business.

Tactical Questions to Ask

The sources recommend asking a series of concise, tactical questions to gain a deeper understanding of the founder’s operational plan and strategic thinking. These questions can be prefaced with qualifiers like "briefly" or "quickly" to signal a desire for concise answers. Examples of such questions include:

Analyzing Founder Responses

The sources advise analyzing founder responses to assess their practicality, honesty, and self-awareness. While a healthy dose of optimism is expected, answers that are completely disconnected from reality or lack any acknowledgment of potential challenges can be red flags. The goal is to gauge the founder’s balance of ambition and realism.

Assessing Founder Commitment and Resilience

The sources highlight the crucial importance of evaluating a founder's commitment and resilience. The ability to persevere through tough times, make personal sacrifices, and adapt to unexpected challenges is often the defining factor in startup success. Investors should consider whether the founder is willing to:

The Value of Concise Communication

The sources advocate for valuing concise communication, not only during meetings but also in written correspondence. They suggest using short, direct emails to assess a founder’s ability to get to the point and address key questions efficiently. Founders who struggle with concise communication may indicate potential challenges in executing their vision effectively.

Chapter 20 Founder or Fraud?

The Allure of the Startup World

The sources portray the world of tech startups as a captivating and glamorous domain, often drawing comparisons to the rock and roll scene of the 1960s and 1970s. Founders like Bill Gates, Steve Jobs, and more recently, Mark Zuckerberg and Evan Spiegel, have achieved a level of fame and influence that rivals that of legendary musicians. Their stories inspire countless individuals to pursue entrepreneurial dreams, hoping to replicate their success and leave a lasting impact on the world.

The Importance of Founder Communication

The sources emphasize the importance of founder communication, particularly in written correspondence. They suggest using a technique of sending concise emails to gauge a founder's responsiveness and communication style. A short, direct email like the following can reveal valuable insights:

Subject: Quick question

Hey [founder name],

What's your revenue this month?

What are you most excited about

this time?

Best

@[your twitter handle]

Evaluating Founder Responses

Founders who respond efficiently and directly to such emails demonstrate a focus on what matters most in the early stages of a startup: building a product, attracting customers, and generating revenue.

Conversely, founders who provide lengthy, rambling responses that fail to address the key questions may indicate a lack of focus or discipline, potentially hindering their ability to execute effectively. The sources caution that these founders may be more interested in playing the role of a founder than in doing the hard work required to build a successful business.

The Empty Can Analogy

The sources use the analogy of “the empty can makes the most noise” to illustrate this point. Just as noisy, attention-seeking students often struggle to advance in martial arts, founders who prioritize self-promotion over substantive progress may falter in the long run. The sources suggest that quiet, focused founders who prioritize execution over hype tend to achieve greater success in the challenging world of startups.

Chapter 21 Evaluating the Deal

The Importance of Traction

The sources explain that evaluating deals in the early stages of a startup's life cycle requires careful consideration of traction, which refers to evidence of user engagement, market demand, and revenue generation. The author categorizes angel investing into two primary buckets:

The author strongly advises new angel investors to prioritize post-traction startups. Investing in pre-traction companies carries a significantly higher risk, as there is limited data to validate the founder's assumptions about market demand, product-market fit, and the viability of their business model.

The Risks of Investing Too Early

The author argues that investing too early is a common mistake made by novice angel investors. He presents a series of back-of-the-envelope statistics that highlight the high failure rates of startups at various stages of development:

These statistics underscore the importance of waiting for tangible evidence of traction before committing capital. While some seasoned founders with a proven track record may be able to secure funding based on a compelling idea or a well-crafted business plan, new angel investors should exercise caution and prioritize startups that have demonstrated some level of market validation.

The Role of Valuation

Valuation plays a critical role in the angel investing process, representing the estimated worth of a startup at a specific point in time. The author provides several techniques for understanding and assessing valuation:

Prioritizing Key Factors over Valuation

While valuation is an important factor to consider, the author argues that it should not be the primary driver of investment decisions. He suggests that investors prioritize a deeper understanding of the following aspects of a startup:

By focusing on these fundamental aspects, investors can make more informed decisions that go beyond a superficial assessment of valuation.

Chapter 22 Why Angels Should Write Deal Memos

The Value of Deal Memos

The sources explain that deal memos are written records that document the rationale behind investment decisions. While venture capital firms routinely use deal memos to formalize their investment process, angel investors often overlook this valuable tool.

Venture capitalists typically invest larger sums of money in fewer companies compared to angel investors. They may spend months or even years evaluating a company before committing capital, carefully analyzing market trends, competitive dynamics, and the potential for long-term growth. Due to the scale of their investments, venture capitalists take a more cautious and deliberate approach.

Angel investors, on the other hand, often invest smaller amounts in a larger number of startups, operating at an earlier stage where there is less data and more uncertainty. This can lead to a more intuitive and less structured approach to decision-making.

The sources argue that adopting the practice of writing deal memos can benefit angel investors in several ways:

The Structure of a Deal Memo

The sources provide an example of a highly effective deal memo written by Roelof Botha of Sequoia Capital in support of an investment in YouTube. While the specific format of a deal memo can vary, the sources suggest including the following key sections:

The Benefits of Transparency and Candor

The sources stress the importance of being transparent and candid in deal memos, even when highlighting potential risks or concerns. In the case of YouTube, Botha's memo acknowledged significant challenges, including intense competition, revenue uncertainties, and legal complexities. However, he ultimately recommended proceeding with the investment based on the company's strong team, massive user growth, and potential to disrupt the media landscape.

This level of transparency can be beneficial for several reasons:

Practical Applications for Angel Investors

The sources acknowledge that writing formal deal memos may not be practical for all angel investors, particularly those who are just starting out or investing smaller amounts. However, they suggest adapting the principles of deal memo writing to develop more structured and thoughtful investment practices. This could involve:

By adopting these practices, angel investors can benefit from a more structured and informed approach, even without writing full-fledged deal memos.

Chapter 23 The Perfect Way to Decline a Deal

The Importance of Graceful Rejection

The sources emphasize the importance of handling rejections with grace and professionalism in the angel investing world. As an angel investor, you will inevitably have to say no to a large number of founders, and how you handle these rejections can impact your reputation and future deal flow.

The Psychology of Rejection

The sources explain that founders, particularly first-time entrepreneurs, can be deeply invested in their ideas and may take rejections personally. The author shares an anecdote about his experience with Y Combinator, a renowned startup accelerator, observing that the organization has developed a culture of celebrating even the smallest achievements to protect the fragile egos of their founders.

This highlights the sensitive nature of the founder-investor relationship and the need for investors to exercise empathy and tact when delivering bad news.

The Art of the "Not Yet"

The author advocates for using the phrase "not yet" instead of a definitive "no" when declining investment opportunities. This approach offers several advantages:

Navigating Incubator Hype

The sources caution investors about the potential for "incubator fatigue," a phenomenon where the excitement and hype surrounding startups emerging from accelerators can lead to inflated valuations and unrealistic expectations.

The author advises investors to take a more measured approach when evaluating incubator-backed companies:

By taking this more deliberate approach, investors can avoid getting caught up in the hype cycle and make more informed decisions based on tangible evidence of progress.

Balancing Honesty with Empathy

The author acknowledges that while honesty is important, there is no need to be brutally frank with founders when declining investments. Offering constructive criticism or detailed explanations for rejection can be counterproductive, particularly at the early stage where founders are still developing their ideas and refining their strategies.

The author suggests a more diplomatic approach:

The Importance of Self-Preservation

The sources remind investors that their primary responsibility is to protect their own capital and make sound investment decisions. While empathy and encouragement are valuable, investors should not feel obligated to invest in every startup that comes their way or to provide ongoing support to founders they have declined.

The author uses a vivid analogy of a drowning person to illustrate this point:

You just smile at them as you slowly paddle away, making sure they don’t drag you down with them.

This emphasizes the need for investors to prioritize their own financial well-being and to avoid getting entangled in ventures that are unlikely to succeed.

Chapter 24 Due Diligence Checklist

The Importance of Due Diligence

The sources describe due diligence as the process of thoroughly investigating a business or individual before making an investment. While this practice is common in later-stage venture capital investments, it is often overlooked by angel investors, particularly those investing small amounts at the early stage.

The sources argue that due diligence is essential for several reasons:

The Scope of Due Diligence

The sources acknowledge that the scope of due diligence can vary depending on the stage of the company, the size of the investment, and the investor's level of comfort. However, they recommend conducting at least a basic level of due diligence for all investments, focusing on:

Practical Tips for Conducting Due Diligence

The sources offer several practical tips for conducting effective due diligence:

The Dangers of Skipping Due Diligence

The sources illustrate the importance of due diligence by sharing real-world examples of investments that went wrong due to a lack of proper investigation.

In one instance, the author describes a promising security company that claimed to have signed deals with Facebook and Google. However, upon further inquiry, it was revealed that these "deals" were merely verbal agreements with no concrete evidence or timeline for implementation. This discovery led the author to withdraw from the investment, highlighting the importance of verifying claims and avoiding investments based on hype or unfounded promises.

In another example, the author recounts an investment in a company that was ultimately acquired. However, during the acquisition process, the CEO of the acquired company demanded a significant severance package despite the company's poor performance. This experience underscores the importance of understanding the motivations and character of the founders and conducting thorough due diligence, even in later-stage deals.

The Importance of Honesty and Transparency

The sources emphasize that honesty and transparency are crucial in the due diligence process. Founders should be upfront about their company's challenges and risks, and investors should be clear about their expectations and concerns. Building a relationship based on trust and open communication can help avoid misunderstandings, mitigate risks, and foster a more collaborative partnership.

The sources acknowledge that startups are inherently risky ventures, and failures are common. However, by conducting thorough due diligence, verifying key claims, and building relationships based on trust, investors can significantly reduce their risk and increase their chances of success.

Chapter 25 Your First Yes

Taking the Plunge

This chapter focuses on the process of making your first angel investment after evaluating and selecting a promising startup. The sources emphasize the practical steps involved in finalizing the deal, documenting the investment, and establishing a framework for ongoing communication and support.

Finalizing the Deal

Once you've identified a startup you want to invest in, the founder will typically provide you with the necessary paperwork to formalize the investment. This may include:

Reviewing the Documents

The sources stress the importance of carefully reviewing all investment documents, ideally with the assistance of a qualified attorney. This review should focus on:

Pro Rata Rights

The sources highlight the importance of pro rata rights, which give investors the option to maintain their ownership percentage in future funding rounds. Securing these rights ensures that your initial investment is not diluted as the company raises additional capital.

The author recommends always requesting pro rata rights, as founders are generally willing to grant them without much resistance.

Communicating Your Commitment

Once the paperwork is finalized and the investment is complete, it's essential to communicate your enthusiasm and commitment to the founder. Express your excitement about the company's vision and your willingness to provide ongoing support.

Setting Expectations for Ongoing Communication

The sources recommend establishing a clear framework for ongoing communication and updates. This may involve scheduling regular check-in meetings or requesting monthly updates that include key metrics, progress reports, and requests for assistance.

Documenting the Investment

After the investment is made, it's important to keep detailed records of all relevant documents, including:

Maintaining a Professional Distance

While it's important to be supportive and engaged as an angel investor, the sources caution against overstepping boundaries or speaking on behalf of the company without explicit permission from the founder. Maintain a professional distance and respect the founder's role as the primary decision-maker and spokesperson for the company.

Celebrating the Milestone

Making your first angel investment is a significant milestone in your journey as an investor. Take a moment to celebrate this achievement and acknowledge the effort and learning that led you to this point. However, don't rest on your laurels for too long. The real work begins now, as you embark on the journey of supporting and guiding your portfolio company towards success.

Chapter 26 How Founders Should Treat Their Angels

A Two-Sided Perspective

This chapter offers advice for founders on how to navigate their relationships with angel investors. It acknowledges that founders who seek to understand the investor's perspective will be better equipped to secure funding and build strong, mutually beneficial partnerships. By grasping the motivations, challenges, and expectations of angel investors, founders can tailor their communication, demonstrate their commitment, and maximize the value they derive from these relationships.

Understanding the Investor's Mindset

The sources emphasize that angel investors and founders share a common goal: to build a successful company. Angels are deeply invested in the success of their portfolio companies, not just financially but also emotionally. They act as cheerleaders, mentors, and advocates, providing valuable support and guidance beyond just capital.

Founders should recognize that angels face unique challenges:

Open and Honest Communication

The sources underscore the importance of transparent and consistent communication between founders and investors. This includes:

Building Trust and Loyalty

Founders should strive to build relationships with investors based on trust and loyalty. This involves:

Navigating Difficult Conversations

The sources acknowledge that disagreements or conflicts may arise between founders and investors. In these situations, founders should:

The Importance of a Strong Investor Network

The sources emphasize that a strong network of supportive investors can be invaluable to a startup's success. By cultivating positive relationships with their angels, founders can gain access to:

A Mutually Beneficial Partnership

The author argues that the relationship between founders and investors should be viewed as a partnership built on mutual respect, trust, and shared goals. When both parties are committed to open communication, collaboration, and a long-term vision, the chances of success are greatly enhanced.

The sources ultimately advocate for a collaborative approach where founders and investors work together to overcome obstacles, leverage each other's strengths, and ultimately achieve shared success.

Chapter 27 There Is Nothing More Important Than Monthly Updates

The Power of Communication

This chapter centers on the critical role of monthly investor updates in the startup ecosystem. The author stresses that consistent, informative updates are not merely a formality but rather a vital tool for maintaining transparency, fostering trust, and securing ongoing support from investors.

Jason's Rule of Startups

The author introduces a simple but powerful principle:

**“If a startup isn’t sending you monthly investor updates, it’s going out of business.” **

This statement underscores the correlation between a startup's communication practices and its overall health and viability. The absence of regular updates is often a red flag, suggesting that the company may be struggling, disorganized, or simply disengaged from its investors.

The Importance of Updates

The chapter goes on to explain the multiple benefits of regular investor updates:

Setting Clear Expectations

The author advises investors to establish clear expectations for communication upfront, preferably before the investment is finalized. This involves a direct conversation with the founder, outlining the desired frequency, format, and content of updates.

The author suggests the following language:

“I would like a monthly update from you that includes the key metrics for the business, as well as what you consider the wins and losses since the last email. I would like you to put requests for me and your other investors in the email as well. Every email should have how much cash you have left, your burn rate, and when you will be out of cash so that we can all plan for future raises.”

Enforcing Accountability

The chapter goes beyond advocating for updates, offering practical tips for investors to ensure founders fulfill their communication commitments. The author shares his personal system for tracking updates, which involves:

This system provides a structured and efficient way to track communication, identify potential issues, and gently nudge founders to stay accountable to their investors.

The Case for Candor

The sources emphasize the need for honesty and openness in updates. Founders should resist the temptation to sugarcoat challenges or present an overly optimistic picture. Instead, they should share both the good and the bad, allowing investors to understand the full context of the company's journey.

The author argues that candid communication builds trust, enabling investors to provide more effective support and guidance. By sharing their struggles, founders can tap into the collective wisdom and experience of their investor network.

Responding to Updates

Investors should not passively receive updates. They should actively engage with the content, providing feedback, encouragement, and offers of assistance.

Constructive Feedback

The author suggests framing feedback as questions rather than directives. This approach fosters a collaborative dialogue and empowers founders to make their own decisions. For example, instead of saying, "You need to do Facebook ads," an investor could ask, "Have you considered doing Facebook ads?"

This subtle shift in language creates a more supportive and empowering dynamic, encouraging founders to think critically and explore different options.

Positive Reinforcement

Investors should also offer positive reinforcement, acknowledging the founder's efforts and celebrating their successes. This encouragement helps maintain morale, fosters a sense of partnership, and motivates founders to continue pushing forward.

Providing Targeted Support

Investors can further support founders by offering specific assistance, such as:

Building a Supportive Ecosystem

Ultimately, this chapter advocates for a collaborative ecosystem where founders and investors work together to navigate the challenges of building a successful startup. Consistent, informative updates serve as the foundation of this partnership, fostering trust, transparency, and a shared commitment to achieving a common goal.

Chapter 28 Your Disastrous Second Year as an Angel Investor

The Reality Check

This chapter addresses the harsh realities that often confront angel investors, particularly during their second year in the game. It explores the common challenges startups face during this critical period, highlighting the psychological and financial strains that can arise from a string of setbacks and failures.

The Second-Year Slump

The sources describe the second year of angel investing as a particularly difficult period, characterized by:

Signs of Trouble

The chapter identifies several warning signs that suggest a startup may be in trouble:

Bridge Round Considerations

The sources advise investors to approach bridge rounds with caution, carefully evaluating the following factors:

Traction as a Key Indicator

The chapter emphasizes the importance of traction, particularly in the second year of a startup's life. Traction is evidence that a company is gaining momentum and resonating with its target market. This can manifest in various forms, including:

Pivot or Persevere?

The chapter acknowledges that not all startups will succeed, and sometimes founders need to make difficult decisions about whether to pivot—change their strategy—or persevere with their original vision.

Assessing the Need for a Pivot

When evaluating the need for a pivot, consider the following:

Examples of Successful Pivots

The chapter provides examples of companies that successfully pivoted, including:

These examples illustrate that pivots can be a strategic tool for adapting to changing market conditions and seizing new opportunities.

Navigating the Second Year

The chapter concludes by offering advice for investors on how to navigate the challenges of their second year:

The second year of angel investing can be a challenging period, but it is also a critical time for learning, growth, and developing a deeper understanding of the startup ecosystem.

Chapter 29 Keep Your Head Up

The Psychological Challenges of Angel Investing

This chapter addresses the psychological and emotional challenges that angel investors often face, particularly when dealing with the high failure rate and inherent uncertainties of startup investing. It emphasizes the importance of maintaining a positive mindset, managing expectations, and developing coping mechanisms for dealing with setbacks and disappointments.

The Emotional Rollercoaster

Angel investing is described as an emotional rollercoaster, with investors experiencing a wide range of emotions, from the initial excitement of discovering a promising startup to the disappointment of witnessing its failure. The chapter highlights the psychological impact of these ups and downs, emphasizing the need for investors to develop resilience and strategies for coping with stress and negative emotions.

Maintaining Perspective

The chapter encourages investors to maintain perspective, recognizing that:

Managing Panic and Anxiety

The chapter offers practical advice for managing panic and anxiety, particularly when faced with challenging situations:

Communication Strategies

The sources recommend specific communication strategies for dealing with founders in difficult situations:

The Importance of Candor and Positivity

The chapter highlights the importance of candor and positivity in interactions with founders:

Learning from Failures

The sources emphasize that failure is an inevitable part of the startup journey and that investors should view setbacks as opportunities for learning and growth. They suggest:

Key Takeaways

Chapter 30: Exits: Great Companies Are Bought, Not Sold

Understanding Exit Strategies

This chapter focuses on the various ways angel investors can realize returns on their investments, emphasizing that the primary goal is to eventually sell the shares acquired in a startup. The chapter outlines three primary exit strategies: Initial Public Offerings (IPOs), acquisitions, and distressed sales.

Initial Public Offerings (IPOs)

An IPO, the least common but often most lucrative exit strategy, occurs when a company goes public, listing its shares on a stock exchange. During an IPO, an angel investor's privately held shares become publicly traded, allowing them to sell their holdings on the open market. IPOs often generate substantial returns for early investors, but the author acknowledges the risks associated with holding onto shares post-IPO, citing the volatile nature of the stock market and the potential for significant price fluctuations.

Diversification as a Post-IPO Strategy

The sources recommend a diversification strategy for investors who experience significant gains from IPOs, particularly in the technology sector. Drawing upon examples like Facebook and Twitter, where share prices experienced dramatic fluctuations following their IPOs, the sources suggest reallocating a portion of the IPO proceeds into a diversified portfolio of top-performing technology stocks. This approach aims to mitigate risk and protect against potential losses from over-reliance on a single stock.

Acquisitions

Acquisitions, the most common exit strategy for startups, occur when a larger company purchases the startup. Acquisitions can provide a significant return for angel investors, depending on the acquisition price and the investor's equity stake.

Distressed Sales

Distressed sales, the least desirable exit scenario, occur when a struggling startup is sold for a low price, often to recover some value for investors before the company shuts down. This typically results in a minimal return, or even a loss, for angel investors. The sources recount an experience where the author negotiated for additional shares in the acquiring company during a distressed sale to offset potential losses for their investment syndicate.

The Importance of Negotiation and Protecting Investor Rights

The chapter underscores the significance of negotiating favorable terms and protecting investor rights throughout the investment process, especially during exit events. The author highlights the importance of securing pro rata rights (the ability to maintain ownership percentage in subsequent funding rounds) and information rights (access to key company data and financials). These rights provide investors with greater transparency, influence, and potential for maximizing returns.

A Case Study in Investor Relations: "Jason Calacanis Does Not Eat Shit"

The sources present a real-life anecdote titled "Jason Calacanis Does Not Eat Shit" to illustrate the importance of assertiveness and clear communication when protecting investor interests. In this story, the author details a situation where a venture capitalist attempted to strip the author of previously negotiated rights during a Series A funding round. The author successfully defended their rights through firm and transparent communication, emphasizing their value as an early investor and the potential consequences of disrespecting their position. This anecdote highlights the significance of establishing clear expectations, documenting agreements, and advocating for one's interests as an angel investor.

Chapter 31: Finding Your Groove

Developing an Investment Strategy

This chapter encourages angel investors to develop their own investment strategies, emphasizing that there is no single formula for success. While acknowledging the various theories and frameworks proposed in the startup world, the sources emphasize the importance of personal experience, critical thinking, and continuous learning in shaping one's investment approach.

The Illusion of Control in Startup Investing

The sources acknowledge the inherent randomness and unpredictability of the startup ecosystem, highlighting that even the most experienced investors can't fully predict which companies will succeed. The chapter encourages investors to embrace this uncertainty while developing strategies to manage risk and maximize their chances of success.

The Theranos Case Study: A Cautionary Tale

The sources use the Theranos scandal as a case study to illustrate the potential pitfalls of hype, secrecy, and lack of due diligence in startup investing. Elizabeth Holmes, the founder of Theranos, managed to raise significant capital based on promises of revolutionary blood-testing technology, despite a lack of scientific validation and transparency. The Theranos case highlights the importance of rigorous due diligence, independent verification of claims, and a healthy skepticism towards overly secretive startups.

Identifying Value Propositions: The "Antidote to Poison" Analogy

The chapter emphasizes the importance of identifying startups that offer compelling value propositions, using the analogy of an antidote to poison. Just as a life-saving antidote commands a high price due to its critical value, startups that solve fundamental problems or offer unique solutions are more likely to attract investment and achieve significant success.

Examples of Value-Driven Startups

The sources provide examples of startups that have created significant value by addressing critical needs or offering innovative solutions:

Focusing on Impact and Scalability

The chapter encourages investors to prioritize startups that have the potential for substantial impact and scalability. Companies that solve significant problems or cater to large markets are more likely to generate substantial returns.

The Evolving Role of an Angel Investor

The chapter concludes by acknowledging the dynamic nature of the angel investing landscape and the potential for investors to evolve their roles over time. Successful angel investors may transition into venture capital roles, mentor new investors, or become founders themselves, leveraging their experience and network to create new opportunities.

The Importance of Continuous Learning and Reflection

The chapter emphasizes the importance of continuous learning, adaptation, and reflection in angel investing. Investors should constantly evaluate their strategies, learn from their experiences, and stay informed about emerging trends and technologies to maintain their edge in the ever-evolving startup ecosystem.

Chapter 32: Where Does Your Angel Story End?

Reflecting on the Angel Investing Journey

This chapter encourages angel investors to reflect on their motivations and long-term goals, recognizing that the journey of angel investing is often as valuable as the financial returns. As the author contemplates their own experience, they acknowledge the transformative nature of angel investing, emphasizing the continuous learning, personal growth, and impact on the entrepreneurial ecosystem that extend beyond financial gains.

The Challenges of Success and the Allure of New Ventures

The chapter explores the potential challenges and opportunities that arise from success in angel investing. While highlighting the financial rewards, the author notes the difficulty of replicating early wins, particularly those involving unicorn companies, which emerge less frequently. This recognition leads to a contemplation of alternative paths, such as transitioning into venture capital or becoming a founder again, leveraging the experience and network gained through angel investing.

Potential Outcomes and Scenarios for Angel Investors

The chapter outlines several potential outcomes for angel investors who follow the strategies presented in the book, emphasizing the wide range of possibilities and the importance of understanding the inherent risks and rewards associated with early-stage investing.

Scenario 1: You Return Zero

Despite careful planning and execution, the possibility of losing your entire investment remains. This scenario highlights the importance of bankroll management, diversifying investments across multiple startups, and accepting that losses are an inevitable part of angel investing.

Scenario 2: You Break Even

Achieving a break-even outcome, where the total returns equal the initial investment, represents a neutral outcome. While not ideal, breaking even allows investors to gain valuable experience and potentially refine their investment strategies for future endeavors.

Scenario 3: You Return One to Two Times Your Investment

Generating a return of one to two times the initial investment signifies a modest success. This outcome provides a positive return while validating the investor's ability to identify promising startups and navigate the complexities of the investment process.

Scenario 4: You Return Three to Five Times Your Investment

Achieving a return of three to five times the initial investment represents a significant accomplishment, exceeding typical market returns and demonstrating the investor's ability to select high-performing companies. This level of success provides both financial rewards and valuable experience for future investments.

Alternative Paths and Career Transitions

Beyond financial returns, the chapter explores alternative paths and career transitions that can emerge from angel investing:

Embracing the Journey and the Value of Experience

The chapter concludes by emphasizing the value of the angel investing journey itself, irrespective of the financial outcomes. The experience gained through evaluating deals, interacting with founders, and navigating the startup ecosystem provides invaluable insights, personal growth, and a unique perspective on innovation and entrepreneurship.

The Importance of Hard Work and Continuous Learning

The chapter reinforces the central theme of the book: the importance of hard work, dedication, and continuous learning in achieving success. The author encourages angel investors to approach the process with a growth mindset, embracing challenges, seeking knowledge, and adapting strategies to navigate the ever-evolving world of startups.

Building a Supportive Network

The chapter highlights the significance of building a supportive network of fellow investors, mentors, and advisors. This network provides valuable resources, insights, and opportunities for collaboration, enhancing the overall angel investing experience.

Leaving a Legacy and Contributing to the Ecosystem

The chapter concludes by encouraging angel investors to consider their legacy and the impact they can have on the entrepreneurial ecosystem. Beyond financial gains, angel investors play a critical role in fostering innovation, supporting promising startups, and contributing to the growth of the technology industry.