Angel Investing Mistakes

A history of miscalculations, forced errors and other mistakes I’ve committed during my first 2.5 years of angel investing in tech startups, and what I’ve learned from them:

Mistake #1: Nitpicking on terms. Don’t fixate on corner cases and lose focus. Minor technical victories on deal terms often have zero impact on outcome. Instead, save negotiating bullets for a few high-level features that become important if the company takes off, like follow-on rights.

Mistake #2: Giving bad advice. Early stage companies operate in inherently confusing environments. They get bombarded by conflicting advice from all sides. Don’t make it worse. I try to have the discipline to say “I don’t know” when I truly don’t. It took me a while to learn this one because it goes against the human instinct to want to be helpful when asked.

Mistake #3: Hedging. Don’t vary the bet size on seed stage investments. Instead, keep the individual buy-ins consistent, let the probabilities work themselves out, and reserve some capital for following on later rounds when things go well. Each and every time I’ve hedged my investment size on a startup that looked especially risky, I’ve been proven dead wrong.

Mistake #4: Focusing too much on ideas. The quality of a startup’s team is more important than the idea they’re pursuing. (Ideas change, people don’t.) Nowadays I’d say this is commonplace advice. A few years ago it seemed I heard it less often; in any case, I was skeptical of the concept back then, but I’m a believer now that I’ve witnessed firsthand how pivots occur frequently in real startups.

Mistake #5: Bargain hunting. Coming from a trading background in the public equity markets, I’m predisposed to be a bargain hunter. While that has helped capture good deals in angel investing, it has probably just as often kept me out of hot, richly priced startups which go on to do quite well. Knowing when to be flexible on price is even trickier nowadays, because valuations tend to be 2-3x what they were two years ago.

Mistake #6: Passing on startups that later gain traction. Every angel investor and VC has their list of great companies they passed on. Nobody’s perfect, and it’s the nature of startups to be difficult to predict. Still, I feel my investing radar needs a lot of improvement. At least I’ve learned to avoid the temptation to dismiss startups whose ideas look really bad. (The best ideas look initially like bad ideas.)

Mistake #7: Founder annoyances. A common characteristic of many of these mistakes is that they also annoy the heck out of founders. I admit I wasn’t fully cognizant of how rough a ride it is building a company until I tried building one from scratch myself. Now, I’m more sensitive about not placing even a minor burden on founders unless it’s absolutely necessary.

Mistake #8: Over-optimism. Anyone who’s not optimistic about startups would not get into angel investing in the first place. However, there’s a fine line between optimism and gullibility, and I’ve certainly crossed it multiple times. Over the years I’ve learned to be more skeptical about pitches than feels natural to me. The best investors I’ve seen are basically always skeptical, but they know when to suspend it for the right companies.

Just to be fair, there are a few things I think I’ve been okay at as an investor: saying no fast (quick turnaround); being supportive once I say yes; not meddling; helping out on technical/architecture issues and testing customer acquisition channels.

I love startups and startup investing. It’s a lot of fun, and I always keep in mind how fortunate I am to be invited inside the company-building process with some amazing teams. I’ll keep at it, and maybe after another 2.5 years I might gain enough experience to be a decent angel investor. Then things can get really interesting.