Angel investing:

  • is putting money in the earliest investment rounds of a private business with the goal of getting more money than you put in.
  • the businesses are usually less than 3 years old, little to no ‘traction’ and are still finding product/market fit.

“Angels” — named because they are the investors who come to a founder’s rescue in their hour of need — when nobody else believes in them.

Angel investing — the world has trillions of dollars sitting on bonds, cash, stocks and real estate where it sits there and grows slowly and safely, taking little risk and not changing the world at all. Why not invest in the next Tesla, Google, Uber or SpaceX?

“No risk, no future.” But it doesn’t mean taking reckless investing decisions, but highly educated guesses as an angel investor.

What are two possible ways for an founder to ‘exit’ once a startup is scaled and find P/M fit? The startup gets bought by a bigger company or the company goes public (IPO).

Companies that have P/M fit, a revenue model and scaled to millions of customers have already gone public.

Risk is inversely proportional to reward. The US stock market has returned approximately 7% pa. Hence, it will take about ten years to double your money at that rate. This means that you will never be able to return 100, 1,000 or 10,000 times your money. But if a startup in which you are an early enough investor becomes a unicorn ($1 bn+ valuation) — you will return life-changing money.

What is an accredited investor according to the US Securities & Exchange Commission?

  • earned income that exceeds $200K (or $300K with a spouse)
  • net worth of over $1 million, alone or with a spouse (excluding the value of a person’s primary residence)

Imagine if you had $2.5 mil. So, you decide to invest 10% of your net worth, $250K, angel invest in $5000 increments, and make 50 investments. If one of those 50 companies, becomes worth $10 bn, then that $5K would have a return of 1000x or $5mil.

Likely scenario:

  • Assuming $250K is invested or 7% net worth (out of $2.5mil)
  • A total of 50 investments are made.
  • Five investments return your capital, so you get $25K back
  • Seven investments return two times your capital, so you get $70K back
  • One investment returns fives times, for $25K.
  • One investment return ten times, for $50K
  • One investment returns twenty times, for $100K
  • Total return $315,000 or $65K profit

The last 15 investments get returns, but 70% or 35 investments return zero.

The worst-case scenario is losing 7% of your net worth but the likely scenario of losing 1–3% to gaining 20%.

Downside? You need to find 50 exceptional startups invest in.

What do the best angels offer?

  1. Money
  2. Time e.g. what fires do the founders need to put out?
  3. Networks — provide meaningful customer and investor introductions.
  4. Give actionable advice that saves founders’ time & money or from making mistakes (expertise)

Silicon Valley as the center of the world

Companies from the Bay Area disrupt entire industries. For example:

  • Transportation — Tesla, Uber, Google’s self-driving cars
  • Hotels — Airbnb
  • Advertising — Facebook, Google
  • Politics/News — Facebook, Twitter
  • Entertainment — Netflix

$100bn companies: Apple, Google, Microsoft, Facebook, Amazon, Oracle, Cisco. $10bn companies: Airbnb, Uber, Netflix, Linkedin, Twitter, Pinterest.

The best founders come here, therefore, the angels need too.

There are going to be a massively reduced expectation of a unicorn, decacon or a $100bn+ plus company if you invest outside the Bay Area

In New York:

  • Tumblr (sold for $1.1bn in 2013 to Yahoo!)
  • Etsy ($3bn IPO in 2015)
  • Doubleclick (sold to Google for $3bn in 2008)

In LA:

  • Maker Studio ($900–500 mil to Disney, 2014)
  • Oculus VR (acquired by Facebook for $2bn, 2014)
  • ($1.5bn to Linkedin, 2015)
  • Dollar Shave Club ($1bn to Unilever, 2016)
  • Shopzilla (sold for $525mil)
  • LowerMyBills ($330 mil)
  • Snapchat (privately valued at $20bn+)

Network effects

The nodes are the investors, service providers and talent pool. Whereas building a startup is seen as unemployment elsewhere, there are a thousand more folks rooting for and helping startups in Silicon Valley. In each cycle, the next group of investors and entrepreneurs get bolder.

Literal Moonshots

Not just software, but the ‘full stack’. Elon Musk decided to build actual rockets (and colonise Mars) and electric cars. Travis Kalanick wanted to run a marketplace that matched drivers with riders.

Moral of the story: there’s no place in the world like SV.