alt Hacker NewsWith much love for my angel investors, angel investing is absolutely a mug's game.
If the company doesn't get off the ground (vast majority of investments) you lose all your money.
If the company does get off the ground, you are the lowest on the pref stack, and you have no ability to follow on to protect your position. You're not a contributing employee or meaningful future source of capital so your piece of the pie is just dead weight on the cap table. This means every single subsequent investor (and the founders, if they care more about money than their relationship with you) has an incentive to cram you down.
So net net the chances of success from passive angel investing are only slightly better than playing the lottery.
Best approach would be to make very few investments, where you're able to build a special relationship with the founder, and ideally get a board seat to defend your stake.
===
Edit - to be clear, I don't think startups should be giving board seats to angel investors. It does happen in exceptional cases where the angel is uniquely valuable to the company, and those are the cases where the angel can defend themselves. But they are rare, which is why it's mainly a bad game to play.
Replies
Isn’t angel investing more about networking and feeling like some elder statesman than about returns? That’s my impression anyway, as a non-angel.
Is it a thing for angels to exit in the early rounds?
Instead of being shoved down the cap table by a giant tranche of series A preferred stock, might it not be appropriate to give the angel a payday instead?
I guess some angels want to keep their fingers in the pie? And, more likely, it’s just not a reasonable expectation to see an exit like that way before anyone else does?
Is it not reasonable to ask for a seat in every investment?
> So net net the chances of success from passive angel investing are only slightly better than playing the lottery.
Is this right? An organization running a lottery—their whole job is to run a lottery, they’ve staked their reputation on the fact that they pay out to winners. The one with a reputation to defend is the one paying out.
The company angel investor is dealing with a company that, ultimately, wants to either get into position to sell some service, or wants to get bought. Their raison d'etre isn’t being a reliable payer-out of winners. I’d expect the lottery to be much more honest.
At best it’s a stepping stone to a “real” VC job.
Take a couple years to learn how the industry works, make connections, maybe even get lucky with some bets. Then use all that to either start your own fund or get a job at a big Silicon Valley VC firm.
Hell, investing in general is a "mug"'s game (never heard this phrase before) if you go by per-capita return. It's the exceptionsl performers that make an outsized contribution to revenue that floats the whole boat.
I'm not sure I'm following how anyone can target the angel investors specifically? Aren't all common share holders have the same fate? So if they screw the common share holders, early employees will get the same treatment as the angels? (dilution for example impacts all share holders). I understand that key employees can receive extra shares along the way, but most probably don't in their first 4 years.
This, and I'd add that one underrated upside of angel investing (and being LP of funds) is access to real, unfiltered information about the startup and the market. That's often far more insightful than the "everyone is crushing it" narrative you see in the media. In the article, the author mentions that she found other ways to get that info.
Way off. Angel investing is betting on people you know well enough.
>Best approach would be to make very few investments
Top VCs—who see the best deals and run deep diligence—still only have a 1–5% hit rate. As an angel, you don’t have that level of access or time. Even if you get strong referrals, you’d need to be 10–15x better than elite VCs to pick winners in a small portfolio. Unless you’re investing in at least 10 companies, it’s statistically a losing game.
My experience: I invested in ~200 companies early stage (with some winners like HuggingFace, Checkr & more).