Why I stopped angel investing (and why you should never start). Part 1

Original author: Tucker Max
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I started a business angel investment almost by accident, which sounds pretty strange. Who will “accidentally” invest tens of thousands of dollars of highly adventurous enterprises? Well, I did just that.

A friend introduced me to Clayton Christopher, who raised money for his new alcohol company Deep Addy . Their first product, sweet tea vodka, was great, and he was an experienced entrepreneur, so I joined the project.

Investing was an exciting, interesting process. When the company became successful, I told everyone that I invested in this new vodka that everyone drinks in Austin. The taste of victory intoxicated me, and from that moment I got hooked. I started investing in companies right and left. I became an ardent supporter of angel investing. I wrote about how great it is and encouraged everyone to do it and help a lot of people start a business.

I was wrong.

I completely stopped angel investing, and I also advise you to never start.

Frankly, angel investing is a great activity. When competent people do it properly, great companies are created and everyone benefits. I do not change my position about the activity itself, only about the one who should do it.

I hope that by the end of this article you will understand four things:

  • Why I stopped angel investing
  • Why you should never start angel investing
  • Who should engage in angel investing
  • What to do instead (and how to invest in this area)

The story of my angel investing

I want you to have an idea of ​​my experience in angel investing. I find that 80% of everything that has been written about this activity is complete nonsense created by inexperienced amateurs who have never done it. This does not apply to me.

From 2010 to 2014, I invested $ 1.2 million (of my hard-earned money) in about 80 companies. 36 of these were direct investments. You can see them on my Angellist page. The remaining investments I made through two funds, where I had the status of a limited partner (LP) - the ATX and Evlove VC seed fund, as well as through one fund that I regularly consulted.

I invested well. I want to emphasize that until the money is in your account, all profits are ephemeral. And at the same time I can say that a five-fold return of my 1.2 million is guaranteed. And over the next 6-8 years, thanks to the intrafirm rate of return on investment, I can get a 20-fold (or more) return on my investment.

I also gained fame thanks to my angel investment. New York Magazine praised me as a leader in this type of investment trend. I wrote about some of the projects in which I invested, created a series of posts on crowdfunding - both attracted a lot of attention.

Thanks to these posts (and not only them), hundreds of companies began to contact me with proposals to invest in them, I took part in crowdfunding and angel investing conferences, they asked me to write for magazines, they invited me for live interviews for documentary TV shows, and even offered a role in a documentary TV show about angel investing (which never went on the air). I am also the leader of the best incubator for consumer-oriented startups in the country - SKU.

This is not bragging. With all this, I am a small fish in the world of angel investing. I told you all this just to prove that I have something that most people who write on the Internet do not have about angel investing:I have real experience and success in investing real money in real companies.

Why I stopped angel investing

There are two reasons why I personally stopped investing in angel investing:

  1. There are few good people who want to invest in;
  2. Angel investing is an irrational use of my time.

1. The lack of good people.

Many people say that startups and the world of technology are an economic boom. From an objective point of view, this is not so. Yes, companies receive tons of money, and yes - this contributes to higher prices, but the boom is still far away.

There are many ways to see this, but one is obvious: if everyone is talking about the boom, this is not a boom. Someone says company ideas are crap, and startups don't solve problems. This is all nonsense. In fact, I could see the opposite: most of the latest developments aimed at making the world a better place are being carried out in America thanks to startups. Certainly not thanks to onlookers who talk about technology issues.

Combine two factors - the huge money invested in developing companies, and the brilliant ideas of startups. The result should be something really winning, right? Still, the ENTIRE meaning of investing is the most efficient use of invested resources.

So, since there is enough money and good ideas, what is the problem?

The problem is in people.

The great thing about entrepreneurship is that you don’t have to meet the expectations of investors to start a company - you just start a business without any permission. But, when huge capital is allocated for the development of all these amazing ideas, (in addition to the fact that in the last few years, entrepreneurship has become sexual and fashionable for a certain group of people), it turns out thatThe company is founded by a huge number of people who absolutely must not do this.

I'm not talking about social justice or trying to denigrate someone, but a hundred years ago we could call these people charlatans. But actually it is not. Most of them are very honest people, and their ideas are great. When I say that “they should not start a business,” I mean that in fact they cannot effectively manage startups.

Ultimately, only one thing is important: will you do the job? Over the past 18 months, I have become acquainted with approximately 400 different companies and I can say that 75% of them had good ideas, and more than 50% is a potentially huge market for entry. But my assessment is this: only 20% of the people who found these companies have the skills necessary to implement the project.

These are not random street companies. I’m talking about the teams that I see at the Demo Day events of most business incubators, and those organizations that have already managed to collect considerable initial investments, or already “approved” startups that have passed validation (at least given the definition of this term for today) .

A shortage of talented people is forming into a kind of black hole into which I will not allow myself to be dragged. By the word "ability" I do not mean the presence of a "correct resume." I’m talking about much more fundamental things, for example, that “they don’t have a clue how to sell this product” or “they don’t even have a clue about the business they are engaged in.” Brad Feld very accurately noticed and described everything here . Like him, every day I met with inexperienced children, completely confused in all aspects of business management.

It seems to me that this problem has basically two reasons:

1. Poor education.Poor understanding of the theory of startup development in a full-fledged company. At the same time, there is a lot of information on how to come up with ideas and test them (for example, The Lean Start-up ). The MBA program for business schools is also good, where they teach company management as soon as they create a product that has been validated for the relevant market.

The problem is that there is not enough effective information on how to move from a proven idea to a growing company, what to do and how to do it. In fact, our informal training system, figuratively speaking, will tell you quite well how to go from 0 to 1, and the official education system will teach you how to count from 10 to 1000, but about the path from 1 to 10 (which is significantly different from the other two, mentioned above) very little information.

Note: at the same time, I find the First Round Capital project one of the few places where you can find wonderful unique and informative content in the field of venture investment.

2. Young = bad. Most of the founders are young, and young people are inexperienced, which may be good for many reasons (energy, enthusiasm, ability to adapt, lack of arrogance), but this automatically makes them meaningless in entrepreneurship.

I was extremely stupid in my youth, so I say this based on my own experience. If you do not have the foundation in the form of experience that you can turn to if necessary, then you will not be able to understand and solve the hundreds of problems that come along with the foundation of the company. The younger you are, the less experience you have, and the more difficult it is to cope with managing a business.

This does not mean that young people cannot be outstanding entrepreneurs. Yes, of course, some young people can and do build companies and become terrific executives. Please do not give me the counterarguments of the story of Mark Zuckerberg and Evan Speigel. They are, by definition, the exceptions that prove the rule. For each of them, there are 50 founders who undermined their once-cool companies, making all the typical mistakes of youth. Ask any venture investor about this and he will tell you many more stories. They have much more bad than good.

I know this firsthand - I’ve had enough to see during my investing activities. Two portfolio companies come to mind, each of which has received several rounds of investment from large venture capital funds, where I have to really restrain myself so as not to go to the arrogant stubborn physiognomy of their founders.
Almost every decision they make is wrong, and the worst is that I can say exactly what reasons they make these wrong decisions from, and make an effort to explain which arguments are wrong, what could happen, and point out the right way.

Do they listen to me (or their other investors)? Not. The two founders did what Mark Zuckerberg said about Twitter: "They drove into a gold mine in a crowded car." They are young, arrogant and inexperienced. Their little success hit them in the head, and they think they know everything. I watch how two delightful ideas that were supposed to grow into a great business are destroyed by the inexperience and arrogance of their young founders. And it pisses me off.
Both of them are young men, and young men are particularly prone to such behavior. I prefer investing not in the business of young men, but in companies founded by young women or older people (no matter what gender). My experience has shown that these leaders listen to people, do not believe that they know everything in the world, and make wise decisions based on good principles, and not on the impulses that are caused by attacks of pride.

Research confirms the wisdom of this preference: women and experienced entrepreneurs are better at setting up companies than young men, and the best venture investors agree.

I will return to my initial thought:considerable funds are allocated to support a huge number of great ideas, but there are very few company founders who are able to effectively manage their business.

So why is this so important? Why did I stop angel investing because of this? Because the events that happened in 2000 and 2008 are inevitable. And it will not be pleasant.

As soon as that wave returns, it will sink all these companies. Not because their ideas or business are bad, but because the founders have no idea how to manage the company. As Ben Horowitz said, it is only in times of difficulty, not abundance, who can really see who is a good leader.

2. Angel investing is an irrational use of my time.

And if angel investing seems like an easy, simple and enjoyable activity, then you should not be mistaken. If you do not want to lose the last shirt, then you will spend a lot of time searching for projects, carefully checking the companies in which you invest, and after you invested in them, you will also work with them until you drop so that they become successful.

I will give one example. I invested in PrideBites, a company that creates personalized items for dogs (toys, clothes, blankets, etc.). And I spent at least 500 hours of my time studying the niche of dog toys, stores selling similar products, the nuances of Chinese production and logistics (for two years now, I can give them advice with great knowledge). Not to mention the other 500+ hours that I spent with the team helping them deal with hundreds of problems (Yes, they are young men, and yes, they are inexperienced and bad, but the main thing is that they listen and take direct directions well. And they quickly change for the better, and the company succeeds due to their personal growth and the fact that they have learned a lot).

It’s practically a full time job and it’s only ONE company.

I made money on angel investing. Not so much. And I had a ton of benefits that you may not have. And I leave this niche with confidence, because I know that so many successes were pure luck. Can I spend my time helping the leaders of all the companies I invest in develop? Yes. And if you could skillfully select your founders, giving preference to experienced entrepreneurs, and spend a lot of time with them, perhaps this would solve all the problems?

Yes, I would. This is a very good point, and you are right in calling me to this. This is actually what a good angel is and SHOULD do.

But also for this reason, I decided to stop my angel investing. To really succeed, you need to devote a lot of time to this. Here is one of the most important principles of wealth accumulation (and creating a lifestyle) that most people ignore:

you must spend the lion's share of your time as productively as possible (at the limit of your efficiency), and entrust everything else to others.

Do you remember that in this article I wrote above that there are a huge number of great ideas for creating companies, but very few people who can bring them to life? I am one of those who can, who is able to conduct a company from 1 to 10 (at least regarding some ideas). So I had to choose what would be the best use of my time:angel investing or developing one of these great ideas in a company.

And this was not the question that I managed to reflect on at my leisure. In fact, I was forced to make this decision quickly and under stress.

In 2014, a new business appeared in my hands. Quite by accident, I found a way to turn the writing of books and their publication into a service, thanks to which it was really possible to effectively transfer the knowledge and wisdom of professionals into an excellent book (in just 12 hours). The company gained momentum before we were ready for this: in the first two months, profit amounted to 200 thousand dollarseven without any marketing. And I began to cancel meetings with the companies I invested in, worked until late at night, and my time spent with my family always suffered (the time that I try to protect from the influence of work).

I had to make serious decisions about what I was ready to spend my time on, because I didn’t have enough for these two worlds.

I have done two things:

  1. I calculated the expected benefits that each of the options would bring me, that is, how much I could earn.
  2. I was thinking about which option is most important to me if we discard the material component.

I will not go into details of the expected benefits (there are excellent explanations on Wikipedia ), but in essence it is an assignment of a certain monetary value to various decisions, which makes it possible to assume how much I can earn by choosing one of the two presented roads. Simple calculations showed that the expected benefits of a startup were higher (but not by much). But this was not a decisive factor. I have good money - more than enough not to make decisions that are based solely on money. For me, the decisive factor was the answer to the question:
“Why am I doing this? What really matters to me? ”

It was always important for me to work on what I like and gives life to something new and useful for the world. Whether it was the creation of entertaining literature, a publishing house or a new way of writing a book, I was always motivated by the desire to create something out of nothing, so that it would solve a real problem and have real value.

This is not what angel investors do. They help other people create something out of nothing.

Both options are valuable, but the second one for me personally does not cause huge motivation. I am sure that the time will come when I will be tired and only want to use my wealth and wisdom in order to help the new generation build their business for the future. But I'm still young, and my most productive business years are yet to come. And if I'm not going to spend them solving complex and interesting problems, then what can I do? Why invest your money? To get rich on the labor of others, complaining that there are not enough talents to solve complex issues? That would be serious hypocrisy.

In addition, during my investing activities, I discovered some features that made me think.

To the show Shark Tankit has the highest rating among television shows, there is a reason: people like to feel governors when they have the opportunity to criticize someone who addressed them. This is similar to the modern version of serfs who apply to their master. This is an exciting performance, and I will tell you that it is much more interesting if they turn to you for mercy.

Few people want to admit that this is part of this kind of investment, but it’s true, so I’ll say:

Perhaps the most exciting feelings in angel investing are when people flatter you and beg to invest their capital in them. Thanks to this, you begin to feel influential and respected.

Anyone who says that this is not an attraction for angel investing is cunning. It attracted me (at least in the beginning). I would say that, as I later found out, this is the motivation for most novice angel investors. They like that feeling. But the problem is that these feelings are cheap. In fact, you are not doing anything important - the entrepreneur is doing important work, not the investor.

Self-esteem is deceptive. And although in the beginning you may be intoxicated by it, but soon an understanding will come of how really it is empty and fake. I just wanted to do important work, and not feel satisfied that someone else is working.

This is a fundamental question that everyone should ask themselves:Do you want to be in the arena or are you enough stands? Both that, and another has the value, but personally I prefer to be in an arena, risking and fighting for a place in the sun. I can’t be just a spectator. As soon as I realized this, my decision to leave angel investing became clear. This is such an important lesson, and so few people understand it. So please understand if you haven’t understood yet: the only thing that cannot be made up is time. When deciding how you are going to spend it, you make the most important decision in your life.

To be continued…

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