Angel Investing Unpacked
Angel Investing Unpacked
Insights and Strategies from the Last Money In Newsletter
I’m a big fan of the Last Money In Newsletter. They devote significant time to analyzing illustrative data, which I believe is invaluable for individual angel investors. This analysis provides crucial context to support all angel investors throughout their investment journey.
While they have over 6,000 limited partners (LPs), they’re not managing billions, as one might assume. In reality, only 5% of their LP base commits an average of at least $10,000 per syndicate, which translates to 314 LPs for commitments over $10,000, 131 for $20,000, 53 for $30,000, 46 for $40,000, 40 for $50,000, and just 15 for commitments exceeding $100,000.
This means that 95% are going into syndicate deals for $1k-5k.
These are some of the most impressive limited partners (LPs) in tech, including senior executives from FAANG companies and founders of successful startups that are either approaching a Series C funding round or have successfully exited to enjoy an early, comfortable retirement.
Many investors I speak with enjoy limping into a company for a thousand or two, watching them for 3-6 quarters, and then if they’re doing absolutely everything right and delivering on all of their promises and projections, they go in hard and dial up their investment 100x to meaningfully join them on their journey.
Some investors prefer to spread their chips around by constructing a portfolio aimed at capturing outliers that can yield 50x returns, even though such opportunities are rare, occurring in less than 0.4% of the 21,000 financing rounds. They believe that by making 125 investments of $1,000 each, they improve their statistical odds of achieving a 50x return, enabling them to profit despite the fact that over 100 of their portfolio companies are likely to flounder or fade into obscurity.
Many investors aspire to join the major leagues of finance and launch their own funds in the future, but achieving this is challenging without an impressive investment track record. When you invest in the earliest round of a unicorn, other investors aren't concerned with whether they own 1% or 0.00001%; they are primarily interested in seeing “Seed” next to the company’s logo, which inspires the confidence to invest.
These successes prominently feature in the decks of Fund I, while the angel investments that fail tend to fade into the background, leading many investors to view early venture investments as a step toward their future. Additionally, being on a cap table provides opportunities to attend events where you can network with prominent investors, allowing you to cultivate friendships before approaching them for funding, which fosters a more positive dynamic than a purely transactional relationship, leading to move investment!
Another interesting statistic reveals that only 5% of people invested in 5 or more syndicate deals. So you could in the 5% of active investors in one of the most vibrant and well-heeled syndicates for $1,000, showing that the vast majority of people are learning from this exercise rather than seeing it as a participatory sport. Half of the LPs will invest a nominal amount and then not invest beyond that.
At the start of my career as a tech equity analyst, I worked with Tech Coast Angels, the largest angel group in Southern California. They implemented large minimum investment requirements to ensure that the lavish parties and social events felt less like a country club and more like a collective of investors committed to achieving returns on their investments. Many angel groups require this commitment to ensure that their members are deeply aligned and serious, with their financial contributions reflecting their beliefs and values within the group.
Large angel groups can be seen as the AAA baseball equivalent, with venture capital and private equity firms representing the major leagues in terms of investor sophistication. While these angel groups typically invest a minimum of $25k per deal as they work toward their four annual investments, they consist of seasoned professionals with decades of experience. These investors are also surrounded by peers who possess a similarly deep knowledge and expertise in this type of investing.
These angel groups play a vital role by connecting local entrepreneurs with investors primarily focused on profit, though these investors typically do not rely on these investments for their lifestyle. While many investors are enthusiastic about helping, a significant number choose to participate only through the syndicate's blind fund, if they decide to invest at all. On the other hand, venture capitalists, who are committed to your success, may not always provide the candid feedback that could be beneficial. A great resource available through the SBA is SCORE, which offers free advice to entrepreneurs without any ulterior motives—its sole purpose is to assist fellow community members.
For those looking to learn how to invest in your local community or promising young startups and to hone your skills in venture investment, joining a group like Tech Coast Angels offers a valuable opportunity. You’ll have the chance to learn alongside some of the smartest and most driven individuals in your city, who often share their wisdom and insights. I remember members from Tech Coast Angels, who lived coasted the coast, advising me to sell half of your shares when an investment doubles. This way, you return your principal and can let the remaining investment ride without worry.
Wealthy individuals tend to stay rich because they don't sell their investments when they drop by 20%. Instead, they focus on the long term and are less affected by short-term market fluctuations. Historically, investments that are given time to grow, such as those in the S&P 500, tend to perform well over the years.
Local syndicates typically consist of 50 to 100 affluent investors, while online syndicates, such as those found on AngelList, can expand to over 5,000 or even an unlimited number of participants. These online platforms serve as a common entry point for successful professionals looking to mentor young founders and invest in promising businesses as part of their retirement plans. Notably, they can start investing with as little as $1,000—95% of the time—even in well-established syndicates. This is an important perspective for those considering angel investing, as it often feels like entering a realm dominated by billionaires, when in reality, the barriers to entry are much lower and the water is fine!