Angel investing at its best is a really risky business. But risky does not lose money. Bad risks do. I’m losing money because I left my number one rule, my key discipline.
Be all in.
Over the years, whenever I’ve been involved in a business after I’ve invested, I’ve only lost money one time. Give me a second to think about that. I’m sitting here stunned having come to this realization.
I am flipping through every deal in my mind’s eye. After thirty plus deals, I can only think of one that failed when I was involved in the company. And that company was the second deal I ever did.
But…I lost money on every single deal in which I was a passive investor.
I am not a business sage.
I have a core belief. I believe a business should make a profit. I am always focused on profitability and the path to get there. This influence has caused a lot of friction.
Startups which become a part of today’s incubators and accelerators are often conditioned to raise money and not make money. Growth and market share are baked into their methodologies, advising, and training.
Step 1: Achieve product-market fit.
Step 2: Raise money.
Step 3: Grow to the first milestone.
Step 4: Define the next growth milestone and raise money on past results and the new forecast. And so on…
I agree with getting product-market fit.
I agree with raising money to get out of the ground. But after raising money, I think the business should be hell-bent on getting to profitability.
This proves the economic model. It forces the leadership team to stay lean and focus on doing only what brings money in the door. Once the business gets to profitability, it opens up all kinds of growth scenarios which may require new investments.
What caused my active involvement?
In retrospect, my involvement was driven by the amount of money I invested. Every time I made a large investment, I became involved in the business. I was a highly engaged board chairman.
I didn’t join the management team, but I was very closely aligned with the CEO and knew what the individuals on the management team were thinking. I was part of building the initial strategic plan and closely monitoring the implementation progress.
Earlier in my angel investing career, I would only think of making large investments. This made it easy for me to say “No” to all the smaller deals in circulation, which are the typical deals presented to angels. These entrepreneurs are looking for ten angels to put in $50k each for a total $500k raise.
What I learned about myself is this. If I put $50k into a deal, I just assumed someone else was working with the entrepreneur to help make it a success. I adopted a passive investor attitude and discovered this was one of the best ways to burn my hard-earned cash and a very good way to make a large fortune into a small fortune.
Takeaways: One for you and one for me.
For you: If you want to become an angel investor, I recommend you think more like Warren Buffett and less like a mutual fund manager.
Think in terms of a big investment. A number which, if lost, would have a material impact on your net worth. This will cause you to qualify deals with more careful attention and to do the required due diligence.
Be involved in the company. Think every week involvement, not quarterly or annually. If you are not watching your investment, I bet no else is either.
For me: I am currently invested in ten companies. Two under my old model. These are companies in which I have a significant investment, and I will remain involved. The other eight are smaller investments in which I am passive. Of these eight, two of them are complete write-offs. But I still have six which could provide a good return or at least get my money back.
My plan with the remaining six.
Get involved. Get involved enough to understand what is really going on. Then help the founder and management team where I can, assuming they will allow me to help and assuming I believe they need the help.
I got started on this article because the two write-offs came back to back. I heard nothing for a long time and then bam! The companies ran out of money, missed milestones, and are spending the cash they have left.
I hate to lose my money. It feels awful. I start questioning my competence. By sharing what happened with you, dear reader, I learned small deals which promote passivity result in losing my money. I relearned it is a bit less painful if I’m involved. At least then I know I’ve done everything I could to make it work.