The Truth Will Set You Free by Electric Angel Book Reviews

(Photo: Mike Poresky/Flickr)

I started angel investing well-nigh by accident, which sounds strange to say. Who "accidentally" invests tens of thousands of dollars into highly speculative ventures? Well, I did.

A friend introduced me to Clayton Christopher, who was raising money for his new liquor company Deep Eddy. Their outset production, a sweet tea vodka, was amazing and he was an experienced entrepreneur, so I went in.

Investing was an exciting, interesting process. Then the company took off, and I got to tell everyone I know that I invested in that new vodka that everyone in Austin was drinking. Winning is the ultimate intoxicant, and from in that location, I was hooked.

I started investing in companies left and right. I became a huge cheerleader for angel investing. I wrote near how great it was, I recommended everyone do it and helped a bunch of people start.

I was wrong.

I take completely quit affections investing, and I'm telling y'all to never start.

Be articulate: Angel investing as an activeness is bully. When the right people do information technology the right fashion, great companies are created and everyone wins. I'one thousand not reversing my position on the activity itself, just on who should exist doing it.

By the end of this piece, my hope is that you will understand four things:

1. Why I stopped actively affections investing
2. Why you should never first angel investing
3. Who should be doing angel investing
4. What yous should do instead (and how to invest if you must angel invest)

My Angel Investing Background

Tucker Max. (Photograph: Randy Stewart/Flickr)

This will requite you an idea of my affections experience. I've plant that 80 percent of the writing virtually affections investing is total crap, written by inexperienced amateurs who have never done it. That's non me.

From 2010 to 2014, I put ane.ii million dollars (of my ain money) into ~80 companies. Thirty-6 were directly investments. Yous tin can see some of my direct investments on my Angellist page. The rest was invested through ii larger funds where I am an LP (ATX Seed Fund and Evolve VC), and ane smaller fund I advise.

I've done pretty well with my investments. Emphasizing that no render is truly existent until the money is in the bank, I can say that as a minimum, a 5x return on my 1.2 million is guaranteed. And considering the internal rate of render on the two funds I am in is very good as of right at present, a 20x return (or more) is very much in play over the next 6-8 years.

I as well gained notoriety from my angel investing. I was written upwards in New York magazine equally a leader in the tendency of celebrity angel investing. I wrote virtually some of my investments, and I wrote a series of posts about crowdfunding, both of which got a lot of attending.

Because of these posts (and other things) I had hundreds of companies ask me to invest, I spoke at conferences well-nigh crowdfunding and angel investing, I was asked to write for magazines and sit for on-photographic camera interviews for documentaries and was fifty-fifty offered a role on a TV bear witness near angel investing (that never concluded up airing). I'm also a mentor at the all-time consumer products incubator in the nation, SKU.

This is non bragging. I am a small fish equally far equally angel investors become. I say this merely to establish what very few who write about angel investing on the internet accept: I have actual experience and credentials investing real money into existent companies.

Why I Stopped Affections Investing
There are two reasons I personally stopped angel investing:

1. There'southward a dearth of good people to invest in
2. Angel investing is a poor use of my fourth dimension

1. There are non plenty good people
Lots of people talk nigh the kickoff-up and tech globe being in a bubble. This is just considerately non truthful. Yeah, in that location is a ton of coin chasing companies, and yeah, information technology is pushing prices upward, just we aren't close to a chimera. There are many ways to see this, just the large one is obvious: information technology'southward never a bubble when everyone talks about information technology being a bubble.

There are besides people who say the company ideas out in that location suck, and that start-ups aren't solving big issues. This is nonsense. In fact, from where I sit, most of the cut edge work being done in America to make the world improve is coming from kickoff-ups. None of information technology is coming from the Gawker writers talking about tech's bug, that'south for certain.

Combine these ii things—lots of money chasing start-ups, and start-ups working on big ideas—and that should exist actually expert news, right? After all, that is the ENTIRE indicate of investment: allocating resources to the highest possible utilize.

So if there is enough money and lots of good ideas, where is the trouble?

It's the people.

What'south so swell well-nigh entrepreneurship is that y'all don't take to exist from the "correct" crowd to outset a visitor—you lot can just exercise it, without anyone's permission. But when you have a lot of money chasing all these slap-up ideas, and you combine information technology with the fact that entrepreneurship has gotten sexy in the last few years and become the "in" thing for a sure crowd, what y'all terminate up with is a huge number of people starting companies who take no business at all doing that.

I don't mean this as a social judgment, or to cast aspersions. I hundred years ago we might phone call these people charlatans or snake oil salesmen. But that'southward not what'southward going on here. Most of them are very sincere, and their ideas are great. What I mean when I say "they have no business organization starting a company" is that they cannot actually execute effectively in a start-upwards environs .

Ultimately that's the merely measure out that matters: can you lot do the job? Over the by eighteen months, I've probably looked at around 400 companies in many different areas. I'd say that 75 pct were solid ideas, and I'd say that over 50 percent were in potentially huge markets. But I'd judge that but well-nigh xx percent of the people starting those companies take the ability to really do the job.

These are not random companies off the street. I'chiliad talking well-nigh teams I'k seeing at Demo Days from major incubators, or outfits that have already raised big seed rounds, or starting time-ups that accept gotten press. These are "validated" start-ups (at least validation as information technology is currently divers).

There is an anti-bubble in talented people—a black hole, and I'm not near to get sucked in past its event horizon.

And by "ability" I don't mean "they have the right resume." I mean far more basic things, like "they have no idea how to sell this product," or "they take no idea what business they are fifty-fifty in." Brad Feld captured it perfectly in this piece. I was having conversations like that ane every day, the same equally him, with inexperienced kids totally lost in all aspects of running a business.

I think this became a problem for two master reasons:

one. Bad educational activity: There is non a well-understood theory of going from a start-up to full company. At that place is a lot out there on how to come up with ideas and test them (e.thou. The Lean Commencement-upward), and the entire business concern schoolhouse MBA edifice is corking at teaching how to manage a company once it reaches calibration with a market-validated production.

The problem is there's very piddling effective information about going from tested idea to scalable company— what to do and how to do information technology. In essence, our informal educational system teaches 0 to 1 pretty well, and our formal instruction teaches 10 to 1000 very well, simply there is nigh nothing about ane to x (which is VASTLY unlike than the other ii).

Annotation: First Round Capital is one of the few places I see creating amazing and informative content in this specific surface area of need.

(Photo: Paul Inkles/Flickr)

2. Young = stupid: Most of the founders are young, and young people are inexperienced, which might be great for a lot of reasons (free energy, enthusiasm, flexibility, no assumptions), but it almost automatically makes them stupid at entrepreneurship.

I was exceptionally stupid when I was young, so I speak from feel hither, but without an experiential framework to fall back on, yous take no manner to understand and solve many of the hundreds of problems that come upwards when you start a company. The younger you are, the less experience you have, the harder this whole thing is.

This doesn't mean young people can't excel at entrepreneurship. Yes, of course some immature people can and do build companies and become amazing CEOs. Please, do not point to Mark Zuckerberg and Evan Speigel as your rebuttal; they are past definition the exceptions that prove the rule. For every i of them, there are 50 founders who torpedo their previously hot visitor by making all the standard mistakes of youth. Ask whatever VC yous know to tell you those war stories. They have way more of the bad than the skilful.

I have seen this play out firsthand in my own investments. I can think of two portfolio companies specifically, both of which have raised major rounds from big proper noun VC funds, where I have to actively refrain from punching founders in their stubborn, arrogant faces.

Almost every decision they make is wrong, and the worst function is that I can see precisely how they reason themselves into the incorrect decision, and I accept pains to point out exactly where the reasoning is wrong, what will happen and the right way to become.

Do they mind to me (or their other investors)? No. These 2 founders have done what Marker Zuckerberg said about Twitter, "They drove a clown car into a goldmine." They're young and big-headed and inexperienced, and their little bit of success went correct to their heads, and and then they call up they know everything. I'm watching two astonishing ideas that should grow into amazing companies become destroyed past the inexperience and arrogance of their immature founders, and it drives me nuts.

Side note: They are both young males, and young males are especially susceptible to this. I like investing in young female person CEOs and older CEOs (either gender) much more than younger males. In my experience, they heed to people, they don't assume they know everything, and they make smart decisions based on good principles, not ego-driven impulses.

Studies conduct out the wisdom of this preference: both women practise better and experienced people do better at starting companies than young men, and the best VC on earth agrees:

Which brings me dorsum to my original point: there is so much coin chasing so many good ideas, but there are very few founders who can effectively execute .

Then why does this matter? Why does this brand me stop angel investing?

Because the next 2000 and 2008 are inevitable. And it won't be be pretty.

When that tide comes back in, a lot of of these companies are going to drown. Not because their ideas or businesses are bad, simply because the founders have no idea how to run a company, and like Ben Horowitz says, you lot see who the real CEOs are in times of stress, not abundance.

There is an anti-bubble in talented people—a black hole, and I'thousand non about to get sucked in by its consequence horizon.

2. Angel investing is a poor use of my time (relative to other things)

Even though affections investing looks similar this casual, easy and fun activity, make no fault about it, if you want to avoid losing your shirt, you spend a lot of fourth dimension on it: finding deals, vetting companies you lot're interested in, and then once yous invest, working with them like hell to make them succeed.

Just one example: I invested in a custom domestic dog toy company, PrideBites, and have probably spent at least 500 hours over two years learning about the dog toy space, the dog retail infinite and the complexities of Chinese manufacturing and logistics (so I can amend advise them). Not to mention, another 500+ hours I've spent with the team helping them through all the hundreds of problems that come up. (Yes, these are immature guys, and yes, they are inexperienced and stupid, merely the difference is they listen, and they take directly teaching well, and they have apace gotten better, and their visitor is doing keen considering of how much they have personally grown and learned.)

That's about a total time task—and it's only one company.

I did win at angel investing. Barely, and I did it with a ton of advantages y'all probably don't have. And even I'm getting out, because I know and so much of my success was luck.

Could I do this with all of the companies I angel invest in—spend my fourth dimension helping the founders develop? Yes. And if I really vetted my founders well, and really spent time with them, so wouldn't that solve my issue with investing in experienced founders?

Yeah, it would, that's a very good observation—yous're right to telephone call me out on it. In fact, that's what a proficient angel SHOULD be doing.

But that'south as well why I had to pull the plug on angel investing; to exist truly expert at it would have serious time, and that is not how I wanted to spend my fourth dimension. This is ane of the big principles of wealth edifice (and lifestyle design) that almost people ignore:

Yous should spend the majority of your time on the highest valued use of your time, and delegate or outsource everything else.

You lot remember above where I said there are and then many dandy ideas for companies, and so few people who tin execute them? Well, I'grand i of the people who can execute, who tin take a company from 1 to ten (at to the lowest degree for some ideas), so I had to decide which would be the better apply of my time: angel investing, or edifice one of these great ideas into a company?

This was non an idle question for me. In fact, I was forced to make this decision speedily and under stress.

In 2014, a new business fell into my lap. Completely by accident, I figured out a way to turn volume writing and publishing into a service, and i that was really effective for turning the knowledge and wisdom of professionals into a great volume (in only 12 hours of their time). The company took off before nosotros were gear up—we did 200k in revenue in two months, without even marketing—and I constitute myself having to cancel meetings with the companies I'd invested in, piece of work late into the nighttime and saw the fourth dimension with my family suffer (fourth dimension that I try to concord inviolate to concern intrusions).

I had to make serious decisions about where I was going to spend my time, considering I did not take enough for both worlds.

I did two things:

1. I calculated the expected value of each path, i.east., how much money was I likely to make.
2. I idea almost which path was more important to me in non-financial terms.

I won't deeply explain expected value (Wikipedia explains well), but essentially it's a way to assign an actual dollar corporeality to various decisions, i.east., how much am I likely to make on each path? Some bones calculations showed that expected value of the offset-up was higher (though non by much).

Simply that wasn't the deciding gene. I take decent money, more than enough to not have to make decisions based on money only. For me, the deciding factor was asking myself:

"Why am I doing this? What really matters to me?"

What'due south always mattered to me is working on something I enjoy that creates something new and positive for the globe. Whether information technology was creating entertaining books or a new publishing service or a new way to write a book, the want to turn nothing into something in a way that solves a real trouble and creates real value has always motivated me.

That's not what you practise as an angel investor. What you do is help other people turn zilch into something.

Both paths are valid, simply the second one is not a huge motivation for me personally. I'grand sure the twenty-four hour period volition come when I am tired and desire to simply use my wealth and wisdom to help the adjacent generation build the tools of the future. Just I'm withal immature, and I all the same have my most productive business concern years in front of me. If I'm not going to spend information technology working on the difficult and interesting problems, then what I am doing? Investing my money for what? To become rich on the labor of others, while I complain that there isn't enough talent solving the hard problems? That would be seriously hypocritical.

Beyond that, I internalized some disturbing things most myself when I was angel investing.

(Photo: Disney, ABC Television Group/Flickr)

There's a reason that Shark Tank is the highest rated show on Idiot box; people beloved the vicarious thrill of being able to sit in judgment of someone else asking you for something. It'southward like a modern version of medieval serfs petitioning their lord. That is compelling spectacle, but let me tell yous, information technology is even more than compelling when it's you they're begging from.

Few people are willing to admit this about angel investing, but it'due south clearly truthful, so I'll say information technology:

Perhaps the biggest thrill in angel investing is that people flatter you and beg yous for your resources, and this makes you feel powerful and respected.

Anyone who says that isn't a draw of angel investing is lying. It drew me in (at to the lowest degree at the beginning). I would say that this is the motivation of the majority of the amateur angels I encounter out at that place, too. They like how it makes them experience.

Merely the thing is, it'southward a cheap thrill. Y'all aren't really doing the important piece of work— the entrepreneur is the 1 doing the of import work, not the investor .

It'due south a false feeling of importance, and though information technology can be intoxicating at offset, I quickly realized how hollow and unfulfilling it really was. I wanted to actually practice important work, not just feel expert about someone else doing work.

It's a bones question we all have to ask ourselves—do yous want to be in the arena, or are you O.Grand. on the sidelines?

Both are valid, but personally, I gotta exist in the arena, competing, putting myself on the line. I tin can't just watch.

Once I understood this, the decision to terminate angel investing was pretty articulate. This is such an important lesson, and and then few people empathize it, so please understand this if yous don't already:

The only matter y'all tin can't replace is time. Deciding how you spend it is the nearly important decision in your life.

Why Yous Should Not Outset Angel Investing
Those are my personal reasons I stopped angel investing. They may or may not apply to you. But even if they don't, you should still not angel invest. Here's why:

1. The economics of affections investing work against all simply a select few
2. The structure of angel investing works against all just a select few

1. The economics of angel investing work against all but a select few

If you lot do not understand that quote, then you should never put any coin in a start-up, unless it'southward money you lot are fine setting on fire and throwing out of a window, because that's what you're doing.

Peter Thiel gives a long caption of power laws here, but Sam Altman explains information technology quickly:

"Everyone claims that they sympathise the power constabulary in angel investing, but very few people practice it. I think this is because it's hard to conceptualize the difference between a 3x and a 300x (or 3000x) return.

Information technology'southward common to make more money from your single best angel investment than all the balance put together. The event of this is that the real hazard is missing out on that outstanding investment. "

He continues on to explain what this means:

"Don't try to get good deals on valuation and hope for these $xx-30 1000000 exits because besides many things become wrong…and if you wait at people who accept been really successful affections investors, they're the ones that accept bets on founders and ideas that they believe can be huge, and cheerfully lose their money a lot of the time."

This ways two very specific things. The only style to be a truly successful affections investor is to:

1. Invest in a ton of kickoff-ups, be cool with watching nearly fail, and,
2. Have enough money to do both initial investments, and serious follow on round funding (at to the lowest degree pro rata, because tripling downwards on that one company that makes your whole portfolio is how you make pretty much all of your coin)

You may call up yous understand this, only you probably don't. Paul Graham explains more:

"In start-ups, the big winners are big to a caste that violates our expectations about variation. I don't know whether these expectations are innate or learned, merely any the cause, nosotros are only not prepared for the 1000x variation in outcomes that i finds in startup investing."

Considering YC understands this well, they've structured their whole program to search for these companies, and explicitly pick companies based not on who is highly likely to be successful on a low level, but on who has a shot at beingness 1 of the mega winners. This means they are reducing their "win" rate and then they tin increment their "home run win" rate.

O.G., fine, allow'south say you empathize ability laws really well, and y'all take a ton of money, then you are willing and able to put 5 figures into 100 companies to ensure you hit that one massive Uber-like home run.

Well, congrats, that'due south— simply the table stakes to go far the game . You still accept another major problem.

2. The structure of angel investing works against all but a select few

The other problem is that at that place are, at best, merely a few of these massive home run companies formed each yr. You think you can predict, out of the thousands of showtime-ups launched each twelvemonth, which ones will be the winners?

A lot of people recall they tin. Almost all are wrong.

Only hither's the most messed up part: even if y'all can reliably choice the winners with some degree of certainty, you're still probably going to lose.

Why? Because you probably can't become into the winners.

This is because the best companies (at to the lowest degree in Silicon Valley) tend to get identified early, and as a result, they accept a lot of people trying to put money into them. And to even be able to put coin in, yous have to have a mode in, which means one thing:

It most e'er takes the correct social connections to get into very early stage companies.

Let me be super clear near this: all the great deals I got into were because of my social network. That'southward it. No other reason.

This is (basically) true for pretty much every other angel investor. You win because of your network.

This means that only a certain type of person can truly be successful angel investing. Here are some examples of the type of people who win consistently and win large at angel investing:

Paige Craig
Chris Sacca
Elizabeth Kraus
Kevin Colleran
Shervin Pishevar
Gary Vaynerchuk
Scott & Cyan Bannister

What separates them from everyone else?

1. They have a solid reputation congenital over a decade (or more) every bit groovy people who work hard for the companies they invest in,
2. They have deep and vibrant networks in relevant start-upward fields, congenital by doing a ton of things for other people (or considering they are old founders or employees of tech companies, or both),
3. They accept the coin to double and triple down on their picks, and wait a decade for them to pay out,
4. And they have something key that I've left out: they have the social ascendancy to not get run over past VCs and literally pushed out of an investment. Oh, sorry, even the big angels have to worry nearly that.

Do yous have those things? Considering the people you are competing against exercise.

Seriously, read this postal service simply about what Chris Sacca does for his companies. Or read about all the things that Paige Craig did just to arrive the first raise Airbnb always did. Paige does this for dozens of companies, which is why Paige is such a sought-afterward affections that the best companies go to him. (Total Disclosure: I know Paige well. He's helped me and then many times I could write a love letter about him.)

Yous probably tin't come close to doing what these people do every bit angels. If you tin compete, well maybe you're right. But realize that thousands of other people have read the same things you have, and are taking classes on this now.

Yous are not alone, and you are way backside, and it's getting harder and harder to build the skills and networks necessary to compete, and more and more money is chasing fewer and fewer capable entrepreneurs.

In fact, if at that place's a bubble anywhere, I think it'southward in the number of affections investors.

I bet you saw the weblog post the AirBnb CEO put up a few months ago, showing the seven rejection emails he got raising his offset investment. I was forwarded this past a few people proverb things like, "I would have known this company was a hit, I should affections invest." Maybe and so.

But here's what you aren't seeing: That e-mail was only sent a scattering of people, all of whom were already established angels/VCs. It wasn't going wide. The best companies never do that. Unless you can establish yourself to be the type of person that Brian Chesky would call back of to send that e-mail to, you should probably not be angel investing.

That's why I'm telling yous to not angel invest. With the exception of a very specific type of person who, like Liam Neeson in Taken, "has a very specific prepare of skills" and makes this their full-time focus and goes all in, the entire structure and economic science of angel investing works against y'all succeeding.

If You Must Angel Invest, How Practice You Do Information technology Right?
The all-time way to invest in commencement-ups is to be a Express Partner in a VC fund that's run past someone who tin can do this. You pay a 2 percent fee and 20 percent of the have, and for that, you're ownership all of those skills and connections. That's what I exclusively do at present (and that's probably where the vast majority of my returns will come from, those funds I invested in).

Only that is really unsafe likewise. Why? Considering most VC funds lose coin.

You need to know who to even invest with, and and then hope yous pick the correct fund. And to do that, you have to have the connections to go into them because the all-time funds can option their LPs…and you're now back to the aforementioned networking trouble nosotros simply talked about.

Is there any other way to invest in get-go-ups, and avoid at least most of these issues?

Right now, I can but run into one effective method for an average person to become reliable and (relatively) safe access to high level affections deals:

Use Angellist Syndicates

These are the safest, well-nigh reputable way for a small time, no-connections investor to get into serious deals. Angellist is doing something pretty amazing here, and it doesn't get the press that it should. This has real potential to modify the first-up investing world for the amend.

Nigh of the angels I linked above have a syndicate, and there are more listed here (Tim Ferriss and Naval Ravikant are two other skilful syndicates to be in). No, I become nothing if you join their syndicate, and yep, I also have a syndicate and I didn't link it considering I've never used it and I don't recommend you join it.

If you desire to allocate some portion of your portfolio to angel investments, this is probably your best option. But I would read extensively about this before doing it. The risks are real.

What Almost Equity Crowdfunding?
I used to think disinterestedness crowdfunding would be amazing. I was a huge cheerleader. And I nonetheless retrieve it will be…someday.

But right at present, it's mostly a bad deal and I recommend that virtually people avert equity crowdfunding.

In that location are a lot of reasons why this is truthful; I could tell y'all the story about how I got screwed out of what should have been an amazing exit because of a platform that failed to negotiate an acceptable liquidity preference.

But I think this tweet storm (and story) by Jason Calacanis might be the best summary of the reason equity crowdfunding is very problematic right now:

What he is describing is a basic pump and dump scheme, and you are going to run across a huge number of people scamming and getting scammed through equity crowdfunding in the well-nigh future.

The sad reality is that people are already getting screwed left and correct in equity crowdfunding, and they don't even realize it, and yous don't hear about information technology because information technology'south in no i'due south interest to tell y'all the truth.

Why?

Considering anybody is making money—except the small investors using equity crowdfunding platforms.

Personally, I would avoid all equity crowdfunding for correct now. Let other people take the risks, lose, become pissed, and eventually nosotros volition find equilibrium in the system.

Equity crowdfunding volition be amazing and totally worth information technology someday, merely not today.

Conclusion: Don't Affections Invest To Generate Wealth, Build Companies Instead
I did win at angel investing. Barely, and I did it with a ton of advantages you probably don't accept. And fifty-fifty I'm getting out, because I know so much of my success was luck.

If you must invest in start-ups, and so employ Angellist syndicates.

If you really call back you lot want to exist an angel, exercise it full time and 100 percent, otherwise you're setting yourself up to lose.

For most people, you're better off spending your time and money learning skills and building the company yourself (or fifty-fifty better, join a slap-up company phase early and help them on their journey, it'south safer and you tin can make a ton of money still).

The all-time opportunities out there for virtually people are in creating, not investing. Kevin Kelly said information technology best when he said we are only at the offset of the incredible changes coming, and that well-nigh of the best ideas are still out there.

Notice ane and arrive reality, like I am.

Tucker Max is the CEO of Book In A Box, and a #1 New York Times Best Selling Writer.

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Source: https://observer.com/2015/08/why-i-stopped-angel-investing-and-you-should-never-start/

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