10 Mistakes I made as an Angel Investor

“Early stage investing is hard. You lose more than you win." Fred Wilson

“Early-stage investing is hard. You lose more than you win." Fred Wilson

I have close to 30 startup investments now. While I started investing at 24 while building my first company, I paused in between (due to conflict of interest while working at a Fund & then leading Startup Programs at Facebook) and then started actively again from January 2020 onwards. I’m fortunate to have had some hits in my portfolio in the last 2 years (thanks to the liquidity in the market) such as Plum, Kutumb, Chingari, Rupifi, 10Club, Jar, Basic, etc. While these markups are on paper and gains are unrealized (~5x of capital invested, ~300% IRR), it helps to have your thesis validated when the company goes through up-rounds. Given that I’ve been investing for close to 6 years now, I definitely have earned my fair share of stripes with more misses than hits and more learnings than wins so here are the 10 mistakes I would avoid as an angel investor. Before we get started, please make sure to subscribe if you haven’t already.

1. Overinvested in my first startup investment, only for it to shut down - I was 24 & naive. I thought if I had a deep conviction in a team/company, I should go all-in. I had limited liquidity at that point but wanted to be ‘risk-on’, so I ignored the old-age wisdom of diversification and made a big commitment (for me at that time). And boy oh boy, did that hurt! The company shut down in 2 years. The founder was depressed, stopped taking my calls, and just disappeared. It felt like betrayal & it really hurt but that’s not the point of this story. My core learning was that I should’ve started out with smaller cheques and diversified. To anyone starting out: build a portfolio over 4-5 years, decide the quantum you want to allocate to startups, and pace yourself. Invest in at least 15-20 companies if you really want odds to be on your side. Like public markets, liquidity in the private markets also goes through bullish and bearish phases and there is a tremendous market risk if you over-index during a bull market and miss out on fairly valued deals during a bear market. Save yourself the pain & don’t do what I did. Diversification is KEY. :) A graph from AL (article linked here) actually makes the case for # of investments = Higher IRR

   

2. Not backing resilient founders because their “moment in time” idea was not all there - Out of the 42 unicorns India has, I must’ve seen at least 15 of them at the seed stage, if not more. I can now say that the best founders are like consistent compounders, where they 10x themselves every year. And those who have grit and resilience to not give up when times get tough are truly a rare breed. The best founders will eventually figure it out and will go through multiple ideas and business models (as most enduring companies do). If you know that someone is exceptional and have seen them compounding themselves, it is worth backing them even if you’re not fully convinced about their idea or go-to-market - because those are the people who win in the long run. 

3. Getting so excited about the idea so much that I didn’t pay attention to the team quality and dynamics - Given that I’ve built businesses myself, I’m usually brimming with ideas and there are more ideas in my head than what I can realistically execute upon. In the past, I’ve made the mistake of over-indexing on the idea and not giving enough weightage to the team behind it. I ignored some early signals: who would want the limelight or be the face of the co., do the founders’ values align, do other people enjoy working with the founders etc. Co-founder conflicts and splits contribute to roughly 50% of startup deaths and the startup cannot win if they don’t have a strong team. Look for people who’ve interacted with customers at length and have deep customer insights, ignore what they’re saying (often BS/the art of storytelling). And definitely keep your biases in check - just because you think an idea has the potential, don’t back the first team that you see trying to attempt it - find the best team working on it & do your market research. 

4. Taking too long to commit or perform diligence - Best founders have optionality & will move fast. Capital is truly just a commodity in today’s market - the best founders will see insane inbound (from scouts, analysts, and funds) and sometimes have their rounds fully subscribed even before they’re in the market. I’ve missed out on some mega opportunities because I wanted to give diligence more time or couldn’t build conviction in 24 hours. While I don’t encourage anyone to make rash decisions, the opportunity cost is high if you take very long to decide. What I’ve started doing instead is, that I build a thesis on different white spaces in the market and try to have a pulse of what’s going on in the ecosystem so that when the right team and opportunity comes along - I can commit. However, I will also not get forced or carried away to invest in something I don’t fully understand. You just have to make peace with missing out, sometimes.

5. Mirroring other people’s convictions and looking for signals - If you have conviction in a deal, don’t wait for signals. A lot of people in the ecosystem don't want to lead rounds, they only want to co-invest. They will often ask for ‘who else is investing’. In my opinion, this herd mentality does not help you tap into alpha. You need to think critically and independently because your loss will be yours to deal with. Similar to how you don’t split profits on deals that work, you can’t blame others for the losses you incur because you didn’t do your homework. Often, while an institution participating in the first round of the company is a reassuring signal, there is a tremendous risk of negative signaling if they don’t participate in the follow-on rounds. Don’t blindly put in money because X is participating.

6. Not participating in pro-rata and getting diluted in my winners - a potential 50xr can very quickly become a 25x after dilution then you have 20% carry and taxation on top of that..so overall your returns aren’t as spectacular. While I don’t see this one as a mistake, as I consciously decided to diversify in the first 2 years, (invest in more companies VS investing more in companies) - it did affect my overall returns but each to their own. What is 5x today, could’ve been 10x but the risk with that is that you typically invest at a higher valuation + roughly only 40% companies make it to Series A from Seed, and then about 25% to Series B - so even if you invest in an early winner, it may or may not win long-term. So while there’s no one way of doing it right - just consciously choose which side you want to be on.

7. Focusing on my misses rather than wins - It’s hard not to think about what could’ve been when you see a company at pre-seed sub >$5M valuation, go to $500M valuation in less than a year. 100x in 12 months?! Yeah, I’ve had A LOT of those happen in the last 6 years. However, you just cannot operate from a place of FOMO because that will impair your decision-making process. There will be MANY misses if you’re in it for the long-term, and the only thing that can see you through is acceptance. You’re in the good when both your anti-portfolio and your portfolio are going up, that actually means that at least you’re exposed to the best deals. A lot of investors never see good returns because they don’t necessarily have the access to the best deals. So keep your head in the game and keep taking the shots rather than thinking about the missed home runs and 3-pointers. :) 

8. Taking an expert’s advice when they were very micro & didn’t understand how their industry would get disrupted and macros would completely change. Yes, been there, done that. Earlier I would talk to many deep domain experts to try to build a conviction in a deal. It helped to do that as I could weigh the pros and cons and develop a balanced view. However, a few mistakes resulted from talking to experts who only focus on day-to-day and micro and have no idea how a black swan event could change everything about their industry. I said no to 2 deals, which went ahead and became category creators and completely wiped out the incumbents. So never take an ‘experts’ advice at face value, do a lot of digging and build your own thesis.

9. Power Law is very, very real, don’t think you’re any different - It’s highly likely that as an accomplished professional/operator, you’ll come to investing and feel super confident about your abilities to sniff out the winners. I’ve seen many people in their first few years have tremendous confidence, only to hear about them getting wiped out or performing below the average 5-10 years later. While we all like to think we’re different and unique, the truth is the universe is governed by patterns and laws that you can’t defy like gravity. You may wish for every portfolio company of yours to be an outlier and a decacorn, but that’s just not how Power Law works. Re-look at your expectations of returns from this asset class. 1/10 or 2/20 companies will become outliers, rest die or fail to return even 1-3x of the invested amount. 

10. Stay in the game: As I mentioned earlier, I paused investing for a few years but in retrospect, I shouldn’t have. If I’d stayed in the game and made use of my network and skills, I would’ve done much better as an angel. My first setback took me a while to recover from but then ultimately I realized that my mistake wasn’t that I invested in that company but rather that I didn’t invest in enough companies. It took me a while to get to this realization but that is the same reason why I’ve made close to 30 investments now. You live, you learn.

If you’re interested in reading more about Portfolio Returns, AngelList has some good reports similar to this. Feel free to go down the rabbit hole.

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