Angel Investing Strategies, Part IV: Achieving Sustainable Investment Success

Introduction

With so many advice for early stage investing available on the internet (including this article series and our previous discussion on due diligence) from industry luminaries such as Dave McClure @ 500 startups and Fred Wilson @ USV, why bother re-examining them?

The issue is that much investing advice comes from professional investors with different goals (growing other people's money while taking a management fee) and timelines (returning capital to LPs in 7-10 years) from individual investors. Based on our previous discussions, early-stage investing requires different strategies and advice for smaller ticket investors, which may contradict conventional wisdom.

So how do we implement these learnings into actual strategies that fit aspiring angel investors?

Time is on your side. Use it to your advantage

In a sense, angel investors run an evergreen fund, acting as both GP and LP. Since angel investors do not have the same contractual pressure to return capital in 7-10 years typical of a fund, we suggest invest at a pace that suits your financial situation and decision making process, as opposed to quickly deploying fully in the beginning of the fund’s “lifespan”.

Given the extreme power law nature of early stage investing, you may have to endure long stretches of “losing bets” or “non-big winner” bets that might not move the financial needle as much as the big winners.

In that sense, your goal is to invest in enough companies for enough at bats, but also survive long enough to hit the aforementioned winner. Remember that early-stage investing is non-ergodic, and quickly deploying all your capital in 2-3 years (as typical early stage funds have to do in order to meet their 7-10 year timeline) might not be financially or emotionally sustainable for the individual investor.

Don’t mentally burn out

Investing isn’t just a financial exercise; it’s also a journey of self-discovery of your investing style and risk tolerances.

The mental aspect of surviving as long as possible means not wearing yourself out before you invest into the winner. Many investor who aren’t aware of this reality will often drop out of investing after quickly deploying capital in a short span of time and not getting results.

Some people make quick decision; some are more methodical in their due diligence. Some like investing with a group, some are lone wolves. The point is to find your own path and invest at a comfortable pace.

Support portcos to the best of your abilities:

We briefly discussed the financial benefits of reducing write-offs in an early-stage portfolio by reducing our reliance on hitting unicorns to achieve above average outcomes. To leverage this, instead of assuming 9 out of 10 companies will fail and ignoring those that aren’t immediate successes, believe that all can succeed and support them as long as there's still potential for outsized positive outcomes. This simple interactive video of crop sharing between two farmers best demonstrates this concept of “equal portfolio support”.

You don’t have to be a senior executive of 20 years with a deep rolodex of industry contact to be of value (although that would be extremely helpful!); as investors our superpower is our listening ear: listen to the founder, care about their mission, and help spread the word about the company’s story.

Develop your own thesis

The best way to support portfolio companies is to have conviction, no matter if you develop that conviction by investing with signal makers or investing based on your own thesis. Leverage the lessons from successful investments (or the rare public failures) from a positive light, and re-evaluating the same success story through the lens of survivorship bias will increase the number of data points you have to develop your investing strategy.

Invest like a Fund of Funds if you really want to diversify

We noted that achieving true diversification in an early-stage portfolio is challenging because of how difficult going from 0 to 1 is. If you must diversify, we suggest diversifying across deal sources, not companies.

Since it's nearly impossible to have a complete view of all companies like in public markets, we strongly believe venture investing is still an active selection process no matter how many investments you make, unlike the passive approach in ETFs that simply tracks ALL companies in the public market based on financial weight.

Essentially, diversify your decision-making process, and not the end results.

We believe this is where AngelList syndicates/rolling funds can add a lot of value for angel investors. Consider joining several syndicates to get a wide variety of deal sources brought through unique thesis.

For example, syndicates that we believe have particularly unique thesis are Peter Livingston @ Unpopular Ventures (The best companies, off the beaten path.), Martin Tobias @ Incisive Ventures (Americans are Lazy, among other meta themes), and of course…shameless plug incoming…The Healthcare Syndicate (compassionate founders build exceptional healthcare companies).

Conclusion

Is early stage investing a sprint or a marathon?

For those with the financial firepower (either HNWI/UHNWI or institutional investors) to treat early stage investing as part of a broader financial portfolio strategy, many of the conventional advice around investing in a large portfolio of companies and optimizing for financial outcome might make sense.

But we believe for individual investors with less financial firepower, much of the advice isn’t sustainable financially and emotionally. Instead, we suggest being more methodical in developing and implementing your investment strategy, treat each investment as a unique journey into the unknown with potential for big financial returns!).

Ultimately, appreciate the fact that business creation is very much a human endeavor with many twist and turns. Stay focused, remain adaptable, and nurture a positive outlook throughout your journey.

And that’s a wrap on this series on Angel Investment Strategies! Please subscribe to our newsletter if you haven’t, and stay tuned to our newsletter for more insights into healthcare innovation and early stage investing!

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