Venture Hacks

This guest post is by Tyler Willis, an entrepreneur and angel investor. You can learn more about him on AngelList.

For several interesting macro-economic reasons [1], more and more people are becoming angel investors.

This is a good thing – it allows more investors to participate in a high-growth (but high-risk) area of our economy. That said, investing in private companies is very different from investing in public companies.

People who are just getting started in angel investing should get comfortable with the inherent risks and learn the strategies required to be successful angel investors. Without doing this, you run the very real risk of losing every dollar you invest in this market.

Two years ago, my first company was acquired by Oracle and four members of our early team, including myself, became part time angel investors. Before I started investing, I tried to learn as much as possible about angel investing. In all of the things I read and people I talked to, two posts stood out as particularly helpful: Paul Graham’s post How to Be an Angel Investor and Naval and Nivi’s How to be an angel investor, Part 2. These posts were helpful because they did away with the inside baseball and tried to present a comprehensive overview for a novice investor.

This year, several of my friends became accredited and asked for my advice on angel investing. Inspired by the opportunity to help them, I looked back on my first year of investing and tried to tie all of those lessons up in a comprehensive overview–think of it as Angel Investing 101. Drawing on the previous two posts, I called the presentation How to Be an Angel Investor, Part 3.

Success as an angel investor boils down to whether you can pick the right companies. The information in this presentation won’t make you a successful angel investor on it’s own, but it can help you avoid the common pitfalls and develop a better understanding of how this market works and whether you’re ready for it.

Because these investments are illiquid, you won’t know for many years whether you are doing a good job of picking the right companies. My best advice is to focus first on learning as much as you can so you can avoid common pitfalls. Once you’ve done that, budget money you can afford to lose and start slowly. You’re generally going to be better served by spreading your initial investment budget over several years, rather than trying to invest it all in a short period of time.

If you find this useful, I intend to create more free resources for angel investors (including video interviews with successful investors sharing their best advice). If you’re interested in more information like this, check out adviceforangels.com.

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[1] Broadly, we’re creating a much more affluent upper middle class. Tyler Cowen’s book Average Is Over is a good read about this if you’re interested.

Specifically, there are a few big changes that have created more angel investors.

• Startups provide equity compensation by default, so the influx of new startups means that more people employed under this model.
• Companies are staying private longer, which incentivizes investors to move to private markets in search of good returns.
• It seems likely that startups will share more equity with employees than they have historically (this is a prediction, but we’re starting to see early examples of this)