from Lenny Rachitsky | by Lenny Rachitsky

I’ve now angel invested in 140+ companies. Here's what's most surprised me about angel investing so far 🧵 pic.twitter.com/KQXEWBoaZH

First, a disclaimer: 1. I do this part-time, and I only vaguely know what I’m doing. 2. I’ve been investing through a bull market. Many people look smart. 3. This is only based on five years of data. 4. This is not investment advice. I’m just sharing my experience.

How it's going so far: 12 of my angel investments have grown into unicorns, 10 more are on track to get there this year, and many more will get there over the years. @AngelList recently shared that I was one of the top 20 investors on their platform. angellist.com/blog/solo-capi…

Surprise #1: I’m usually wrong about which investments will do best When I invest in a startup, I make sure to record how confident I am in that investment—OK, Good, or Great. Looking back, only a third of my best investments—the companies that are on track to drive...

... the biggest returns—I rated as Great at the time of investing. Meaning, if I invested only in companies I had Great confidence in, I’d have missed out on two-thirds of my biggest successes.

I obviously thought they were a good enough bet to invest in, but I didn’t have 100% conviction in most of the companies I’ve invested in. And it turns out that’s the right move as an angel investor.

"VCs like to pretend that they’re really smart, but ultimately it’s just math. A single 100x or 1,000x deal will return your fund. But it’s nearly impossible to know which deal that will be. The important thing is to invest in enough deals that could 100x+.” — @JuliaLipton

AngelList also found that early-stage investors do best if they invest in every credible deal vs. trying to pick the few winners. This is also why the general advice is to invest the same check size into every deal. angellist.com/blog/venture-r…

Takeaway: If you see something special about the startup, and there’s a path to a 100x exit, consider investing even if you don’t have full conviction.

2/ Surprise #2: Most deal flow comes from other investors—not founders, friends, or colleagues Seven of my first 10 deals were in my friends’ companies. The other three came from other investors sharing a deal with me. As I’ve gotten more active, that ratio has reversed. pic.twitter.com/LpCPMbvOYg

Now the majority of investments I make come from other investors (mostly angels and solo capitalists).

“You can’t be a great investor if you don’t see any deals. Being a friendly collaborator with other investors is one of the best ways to see more investment opportunities. You essentially multiply the surface area of what you see." — @djdan85

Takeaway: Increase your deal flow by building relationships with other active investors. The two best ways to build relationships are to: 1. Build a skill that is useful to startup founders, so that other investors benefit by introducing you to them 2. Share great deals with them

Surprise #3: Great deals are currency among investors You build social capital with other investors by sharing great deals with them. The more great deals you share, the more deals they’ll share with you.

This isn’t always the case due to status differentials (e.g. I share many deals with Sequoia and it has never once shared a deal with me, lol), but in general this holds true, especially with angels and solo capitalists (where most of your deals will likely come from).

"It’s advantageous (and fun) to be collaborative as an angel investor. Sharing deals with other investors keeps you top of mind for when they’re investing in something. I personally try to only send deals when I’m investing so my ‘signal’ is strong." — @toddg777

Takeaway: Seek out three to five awesome angel-investor friends and share everything you see with them. Two tips: 1. Once you decide to invest in a startup, ask the founder if he or she is looking for more great angels. If yes, suggest your co-investors.

2. Send a weekly email to your angel friends sharing the deals you’re looking at. Share just the URLs and a short blurb, unless you have permission to share the deck. Once you decide to invest, tell them asap in case they also want to try to join the round.

Surprise #4: Angel investing is more about access than picking There are three parts to angel investing: capital, access, and picking. Based on my experience, access is by far the most important part. If you have access, you can raise capital, and generally...

...the most popular deals (i.e. the ones already discovered) also end up doing well. So picking becomes secondary.

"As an angel investor, it’s more important to be swimming in a pool of good potential investments than to be an exceptionally good picker. Obviously if you’re able to be both, it’s better :) but if you had to choose between being in a position to see great deals and picking...

... randomly, or coming across average deals and picking expertly, choose the former." — @jaltma

Looking at my own data, over 2/3 of my biggest winners were “hot” deals at the time, and similarly, over two-thirds of the hot deals I’ve invested in have gone on to do very well. Not all investments in hot deals will do well, but broadly, getting access to hot deals is key.

"There are so many incredible founders building great companies today that one of the hardest things to do is to stand above the noise. Even exceptional products need help telling their story and reaching customers and potential hires. Being able to bring that to the table...

...is a leveraged way to help: instead of recommending one hire, you can tell their story to an audience of hundreds of potential hires." — @packyM

One way to track your “access” is: whenever you see a big fundraising round or great exit, to ask yourself—did I have a chance to invest in that company?

All that being said, your picking skills are still important to build over time. A third of my best investments weren’t in hot rounds, and not all hot deals do well. Even top VCs often make terrible decisions. It’s wise to place a portion of your bets on under-the-radar deals...

that you’re excited about. Especially if you have unique insight into the opportunity that other investors may be missing.

Takeaway: Work on building your ability to get into hot deals, and don’t stress out about not being able to pick, especially early on.

Surprise #5: It’s mostly about becoming someone founders want on their cap table To build on the above point, the best way to get access, and thus accelerate your angel investing career, is to become a person founders want on their cap table. There are four paths to this:

1. Useful knowledge: Become very smart about something founders will need help with, e.g. hiring, fundraising, growth strategy, product, marketing, scaling internationally, etc.

"Money is cheap now, so you have to have something other than money to get access. The best thing to have is unique expertise that founders want access to. In my case, it’s my experiences and lessons learned from working on growth early on at companies like Twitch, Reddit,...

...Mercury, and Notion that founders tend to find worthwhile. It can be in any important area, though: sales, operations, people, engineering, marketing, etc." — @jamiequint

2. Audience: Build an audience that founders can someday rely on to amplify the startup’s story (e.g. @packyM, @HarryStebbings, @eriktorenberg, @SahilBloom).

"Building an audience today is more crucial than ever. Why? In compressed fundraising timelines, content allows you to build a ‘pre-sales’ relationship with founders where they know you and how you think, well before meeting you in a raise." — @HarryStebbings

3. Signal: Build status as an investor such that your being on the cap table becomes a strong signal (e.g. @eladgil, @cyantist, @naval).

4. Reputation: Build an amazing reputation with founders, such that they tell all of their founder friends about you.

"Founder NPS scores matter a lot. You may not see the value of being a service-oriented investor in the short run, but over the long run it compounds and the results show up in the most unexpected ways. And founders don’t forget." — @sriramkri

Surprise #6: Follow high-signal leads. But not only. After seeing how professional VCs operate, particularly how much time they spend on due diligence, reference calls, market research, etc., I’ve come to realize that as an angel investor, I’ll never be as good at picking deals.

I’ve found the best strategy as an angel is to try to get into deals led by top investors for the majority of your bets. It sounds obvious, but many angel investors try to find just the diamonds in the rough. I think that’s a losing strategy, especially if you do it part time.

"For companies that get to the finish line, it’s not unusual for me to spend 2-3 weeks getting to know the founder and their business. Now, this is partially due to my strategy—only invest in 2-5 companies per year and spend a lot of time with them...

...I will look into a number of pieces around the business, including their investor updates (to assess how their thinking evolves) and the feature updates (to assess speed of building), and will spend a lot of time on core beliefs around their business (what they believe that...

...they are not willing to let go). I also spend time talking to customers if they have them and references for the founders." — @annimaniac

Looking at my own data, over 80% of the investments I’ve made with high-signal investors are on track to become big successes. Unless you think you’re a uniquely talented picker you’re probably better off trying to get into high-signal deals vs. discovering hidden gems.

Takeaway: As an angel, most of your investments should probably go into rounds led by top-tier funds. But place maybe 30% of your bets on low-signal startups that you’re very excited about or have unique insight into (e.g. the tech, the founders, the market).

Surprise #7: Power laws are real 70% of my paper gains are currently from a one company (which includes three separate investments in subsequent rounds), and 80% are from just four companies. If I had missed these investments, my performance would have been incredibly average.

But I didn’t, and that’s the key. You need to hit a few 100x to 1,000x returns in order for this whole endeavor to be worth your time. Which again comes back to the broad strategy of betting on many companies vs. trying to pick the few winners.

"It’s not about all your deals being winners, but instead a few mega-winners that drive all the returns. Do you believe that these founders have the talent, the resources, the vision, and mostly the will to try and build not a $1b company but a $100b company?” — @louisberyl

Takeaway: Optimize for not missing the 1,000x returns vs. avoiding losing bets. Which, coming back to the very first lesson, essentially means placing many bets. Budget to invest in 30 companies. Plan ahead.

For much more, including how to get started in angel investing, what I look for in companies, and a TON of advice from many other angel investors, don't miss this week's post lennysnewsletter.com/p/angel-invest…

Big shout out to everyone who contributed their insights to this post (too many to list here), plus the @WeAreAirAngels crew 🧡