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Tuesday
Aug122014

An update on my angel investing & AngelList Syndicates

Angel investing is a brutally hard job ...

… said no one ever!

[ 1,600 words on the topic below. Click to tweet:
http://ctt.ec/_G49d ]

I’m absolutely loving being an angel investor. It’s a blast to meet smart folks with killer ideas who want to change the world -- and then I get to write a check and give one out of every 250 of those ideas a try!

In the past year I’ve invested $1.95m in 30 startups from the LAUNCH Fund (from my $10m angel fund). We are now 19.5% invested in 13.5 months. We’ll invest another $4.05m in the next 24 months for a total of $6M/60% invested, keeping back the last $4m to keep our pro rata in the winners.

I’m told this is a savvy plan by my much, much savvier friends.

You may remember that I wrote a blog post 6 months ago about how excited I was to invest in Swell. [http://goo.gl/wwdEGL] Recently there were some reports in the news about Swell and that technology company we all love soooooo much in Cupertino. [ http://goo.gl/nlyYqE]

A company which, I might add, is performing at an absurdly high-level while evolving their strategy ( <---- shameless suck up).

Anyway, we got a “quick win” for my fund and I’m super happy for the founders of Swell. Great things to come from Apple+Swell combo I’m certain.
 

Syndicate Power
-----------------------
During the past four months we syndicated nine of the LAUNCH Fund’s deals to our AngelList Syndicate for a total of $3.18m invested. In those deals the LAUNCH Fund did a total of $550k, while the Syndicate came in for 4.78 times that amount for $2.63m.

Our average Syndicated deal was $353k, with $61k on average coming from the LAUNCH Fund and $292k come from our Syndicates.

Two out of nine deals are closing as I write this, so that $2.63m will be slightly higher if we continue to be vastly oversubscribed.

The LAUNCH Fund will do three deals a month and ~30 a year. If we syndicate 20 of those deals, we are on pace to put $7.67m a year to work.


This is the revolution and no one in the mainstream press seems to have caught on yet  (despite me telling them: “hey, you might want to look over here … something is brewing.”).

A couple of years ago my level of angel investing would be significant on a number-of-deals basis (two or three per month), but not very important or significant on a dollar basis.

Today?

Well, I’m able to lead a round of funding, set the price with the founder, and perhaps even take a board seat. (In most cases we get the option of a board seat, even though I really don’t have the time to sit on that many boards.)

Bottom line: when I wrote about AngelList 11 months ago, and said a bunch of ‘outlandish’ things [http://goo.gl/N7cDa8]; this was all very speculative. Most folks thought that AngelList wouldn’t be able to attract real fund managers, and that those fund managers wouldn’t be able to get access to A+ deals.

Those questions have been answered, and folks like Gil Penchina (serious angel), and Tim Ferriss (serious thinker, author and personality, and developing into a VERY SERIOUS angel investor), have proven that they can bring real deal flow to the platform.

What AngelList Syndicates has done for me most of all is to make me more helpful to founders. Instead of having to manage another dozen angels, they can just manage a relationship with me. Not only that, they get 99 folks on their team who have a literal, vested interest in their success (the members of the Syndicate).

That’s 100 folks for one mention on your cap table. One hundred affluent and connected folks who might tweet out a job posting, or hopefully refer someone to you. Or intro you to a partner or possible client. Or another investor. It’s a big deal.

Moreover, AngelList has given many ‘civilians’ (folks who don’t typically have access to these types of deals), the ability to put $1,000 to $10,000 into deals they would never even hear about until they were well-funded.

There is no guarantee of success, but this is a huge step in the right direction.
 

99 Limit Throttles Everything
--=-=-=-=-=-=-=-=-=-=-=-
The crazy thing about the massive performance to date of syndicates, is that it has all been done even though only 99 people can invest in a syndicate. This is an SEC limit, I believe intended to protect the rich (only accredited investors can participate in this type of deal flow), in some aggregate way.

Brad Feld talks about it here: http://goo.gl/xNqt7Z

I get that the SEC wants to throttle the potential fallout from a deal going belly up, but the entire point of angel investing -- at least the way I do it -- is for 7 out of 10 deals to go belly up! We want deals that are so risky that there’s only a 1-5% chance that the startup will have an absurdly big outcome.

For example, if you invest in 50 quality Silicon Valley startups (real deal flow, not second- or third-tier deal flow) you might have 30-40 return little to nothing. Big zero.

You might have 10-15 return a small amount and have one or two have 50x+ outcomes -- with the lottery ticket chance that you catch a unicorn like Facebook, Uber, Twitter, Airbnb, Dropbox or Box that could return 100-3,000x.

[ Lottery ticket is the key phrase in that paragraph above. Expect one in every three or four lifetimes. ]

In truth, 500 folks investing $1,000 each is safer than 100 folks investing $5,000 each. For me, well, I think people should be able to invest and spend their hard-earned money however they want. I don’t think there should be a category of “accredited investors” vs. “non.” I think that is actually a very class-based system where the rich get richer and the “poor schlubs” (as which I spent 80% of my life being classified) need to be protected from investing in the next Facebook or Twitter.

Poor folk should be allowed to place a $1,000 bet on LinkedIn or Facebook if they think it’s the next big thing -- just like they can place it on a roulette wheel in Vegas.

That being said, the 99 limit should be something like 500 so that we can keep the American economy moving. Rich people are simply NOT investing their money, and getting them to take it out of bonds, second homes, and JetSuite memberships -- and into angel investing -- is critical to our sustained growth as a nation.

Other countries have fewer rules and they will benefit from them. Let’s stop trying to protect the rich from investing their money in startups, and start trying to build more startups -- because startups create jobs. Most of them, in fact.


Should you Angel Invest?
-=-=-=-=-=-=-=-=-=-=-=-=-
I get this question a lot. As far as I’m concerned if you keep angel investing down to 1-5% of your net worth, well, you’ve controlled the risk.

If you put that modest percentage to work in 50 deals, that means, in the most aggressive 5% model, each investment is 10 basis points of your net worth. If you were worth $5m in this example, 5% of your net worth would be $250k. In 50 deals that’s $5k per deal. If you did 2.5% of your net worth, it would be $2,500 in 50 deals.

Well, that’s sort of the sweet spot for angel investing through a syndicate on AngelList, or some of the emerging competitors. That list includes MicroVentures, Crowdfounder, FundersClub, and CircleUp, among a growing list of options.

Again, if you are not an “accredited investor” as defined by the government then you’re too simple or too irresponsible, I guess, to invest your own hard-earned money. #sarcasm
 

More to Come
-=-=-=-=-=-=-=-=-
I’m going to keep updating folks on my education as an angel investor and Syndicate. I’m in a unique station in life, in that I’ve put 25 years into being a journalist and entrepreneur in technology, so I’ve got a heck of a network and a ton of experience.

It’s making angel investing really pleasurable so far, but of course in a market this hot everyone looks like a genius. I’ve been through two brutal, brutal tech corrections in my career and I’m guessing there will be a third some day -- perhaps in the middle of my first fund.

I can’t control that, but I can control the checks I write, and I’m writing them based on big, crazy ideas by passionate people who are executing at a very high level.

If that’s you, well, you know how to find me (and if you watch This Week in Startups, you’ll know what impresses me).

best @jason

P.S. - If you want to join the Syndicate, angel.co/jason
P.P.S. - This Week in Startups is my podcast: www.thisweekinstartups.com
P.P.P.S. - The LAUNCH Festival is March 2-4 at Fort Mason. 12,000 folks will be there, save the date.
P.P.P.P.S. - LAUNCH Scale is an intimate event taking place on October 23-24, more at LAUNCHSCALE.NET & read: Startups are about Scale [http://goo.gl/jhUC16]