Reaction Wheel

If you bootstrap your business it’s your prerogative to make any stupid decisions you want–so long as you don’t run out of money. But if you decide you want your bootstrapped business to be as successful as possible, you probably make pretty much the same decisions a businessperson backed by outside capital does. The process you use to grow a successful business does not materially change because of how you are funded.

So why do angel investors invest so differently than institutionally funded venture capitalists? Angel has come to be a bit of a pejorative, connoting a certain hobbyist nature, an unseriousness, amateurism. When entrepreneurs tell me they don’t want venture firms in their seed rounds, just angels, my antennae go up: what are they afraid of, competence? I stopped calling myself an angel investor some time ago; I try to think about myself as a bootstrapped venture fund, doing the same job with the same professionalism on a smaller scale.

Every would-be angel I’ve met takes pride in their day job, they would never settle for stupid or unprofessional in their work. Even in their hobbies they would not be satisfied with sloppy or half-done. They are serious, successful people who have made their way by putting in the work to do their jobs right. So why, when they think about angel investing, do they impatiently jump right in with only half-assed attempts at learning how to do it right? Why do people who would never sit at a high-stakes poker table with hard-eyed strangers unless they had spent countless hours at lesser tables put tens of thousands of dollars into a startup without bothering to learn the rules, the odds, the other players?

Venture investing looks so easy from the outside. The public faces of VC–Fred Wilson, Mark Suster, Chris Dixon–are encouraging and open, willing to give pithy advice on the dos and don’ts. People like to talk about what they’ve done right and how more of that needs to be done. They don’t tell the stories much about bad times, hard decision and all the work they did to create the few bright spots they write about. They like to make it look easy. If you read the VC blogs, you must wonder how they manage to fill their days when all they do is wander Union Square bumping into top-notch entrepreneurs, writing them checks on the spot, and then flipping the companies to Google or eBay for hundreds of millions of dollars. Union Square Ventures only invests in a handful of new companies each year–with five investing partners. Each partner only does a deal or two per year? It must be like a tropical vacation. Right?

In the New Yorker’s recent portrait of Bruce Springsteen the author makes this distinction: “Keith Richards works at seeming not to give a shit. He makes you wonder if it is harder to play the riffs for ‘Street Fighting Man’ or to dangle a cigarette from his lips by a single thread of spit. Springsteen is the opposite. He is all about flagrant exertion.” Many VCs are trying hard to be cool as Keith Richards. And hey, why not? If you can convince people that you invested in a billion dollar outcome by ignoring the dismissal of all of your peers and the common wisdom and instead just trusting your gut, or that you found the next big thing just walking the floor of a tech company occasionally glancing over engineers’ shoulders at their screens, well that’s probably about as cool as you can pretend to be if you’re a financial intermediary.

But playing the guitar like Richards actually takes a ton of work and an enormous amount of repetitive practice, whether he acknowledges it or not. I’m here to tell you that Springsteen is being more honest than Richards: VC swagger is pure BS. Writing a check is easy; creating a decent chance of getting a bigger one back down the road is hard, damn hard.

Prospective angels ask my advice all the time, as one of the few people on the east coast who has made a living as an independent venture investor lo these many years. I’m happy to answer their questions, but I don’t think any of them has ever taken any of my advice. Ben Franklin said “wise men don’t need advice, fools won’t take it.” But I’m an optimist, so advice will follow.

This will be several posts, broken up into bite-size chunks. I will do my best to suppress my usual rambling ranting. Nothing I write in any of these posts is new. If you did your homework, all this would be old hat. That’s part of the point: I’m going to lay out a score of pages to convince you that to be a successful venture investor you don’t have to be a super-genius, you just have to actually do the work. The main take-away should be that there are no shortcuts.

Some caveats. I’m talking about a specific type of venture investing here, the kind I engage in. Investing in people that can use some modicum of cash to attempt to build a world-class company in a fairly brief period of time. I’m not talking about funding your cousin’s restaurant or your buddy’s bar. Those worthy endeavors have a different logic.

I’m also talking about aiming for a positive return on your investment. If your primary goal is to help out friends, give back to the community, or support a worthy idea then you don’t necessarily care about how much money you make. I’m not going to give advice on how to manage for a non-monetary outcome. I believe in positive returns, not least because if you run out of money you no longer have the wherewithal to fund worthy ideas.

How would professional venture capitalists invest in super-early companies with small amounts of money if they didn’t have the huge amounts of cash potentially needed to single-handedly fund the company through to exit and didn’t have gigantic well-known brands? Because that’s what angel investing is.

Next: The Life of an Angel. The Work-Work Balance (Angel Investing 2)