One Big Difference Between Being an Angel and Fund

One of the biggest differences between being an angel and being a fund is the risk.  The risk is magnified as an angel.  It’s not that being a VC fund manager isn’t risky.  It can be depending on how the fund is set up and how much personal money a fund manager has in the fund.

The risk becomes apparent when a deal fails.

In a fund, at least you have other companies that the fund invested in.  If you are an angel, you may or may not have other companies you are invested in.  When an investment fails, that’s all she wrote.   This is why it is critically important for angels to build a portfolio of investments and have a strategy around it.

To be clear, there is no Chicago Booth Eugene Fama like efficient market theory behind a portfolio of angel investments.  Each new investment has risks that are independent and identically distributed (IID).  Each new investment layers in more risk into the portfolio.  There are also no diversification effects in angel investing like there might be in the stock market.

Plan on making at least ten, preferably at least twenty investments if you want to make money being an angel.  Be disciplined about check size.   Invest the same initial check size in every single deal and don’t waver.  Plan to follow on when an investment becomes successful to a point.  If you can’t stand to lose money, do not be an angel.  You are guaranteed to lose some money.

It doesn’t take a million dollars of capital to be successful.  However, you have to be very realistic about returns. If you decide to invest $10,000 in a deal, it’s not likely to return millions of dollars to you.  A more clear-eyed return might be 10x or $100,000.   If you get lucky, you can get 100x but that is way out of the normal distribution.

I recently had a deal fail.  It’s sad.  The pain is real.  Losing money sucks.  Losing the hope that you had when you first invested in the deal might be just as painful.

Why did it fail?  Execution.  That never seems to be different when deals fail either.

  • awaldstein

    Good post, thanks!

    So heres the thing.

    It appears that the same percent of deals fail over time regardless of the amount of deals that are invested in cross the sector.

    And I bet that the majority of investors point to execution as the reason.

    They are right and wrong.

    Deals fail cause they can’t discover their market before they run out of money.

    If everyone was perfect in executing, the same percentage would fail.

    Is it execution–yes. But really its life.

    • Yes, not finding true product-market fit is a problem. However, I bet a lot of those businesses could be cash-flow or lifestyle businesses. Many times the initial problem they are solving isn’t big enough to build a big business off of-or as Ben Horowitz pointed out in his post on distribution-if you are selling something that requires a lot of human training and intervention to a highly fragmented marketplace where the buyers are small, God help you!

      In many cases, the VC funds companies where the VC misinterprets the true market size. The company fails to find product-market fit and the VC walks away.

      The true crime is when there is product market fit, and the company fails to execute.

      • awaldstein

        I honestly think that it isn’t that if you execute you win, but if you win you have executed well.

        I know this from painful experience.