Shorter Flights at Lower Heights: The Right Way To Angel Invest

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Shorter Flights at Lower Heights: The Right Way To Angel Invest


This is a guest post by Dave Balter.  Dave is the CEO of BzzAgent, founder of Smarterer, an active angel investor and a holder of proms. You can follow Dave on twitter @davebalter

Everywhere you turn these days, you find an angel investor. Aside from those who have always invested small amounts of cash in startups, more and more venture capitalists are making personal side deals, active entrepreneurs are investing in other entrepreneurs, seed funds are cropping up everywhere, and Angel List has emerged for the everyman.

But most Angels will fail to get back the capital they've invested (let alone make money), and it's not because they don't pick good companies or back great entrepreneurs — it's because they're completely mistaken about an Angel's role in the investing cycle.

I know this because my in my early days as an Angel investor I fell prey to behaviors that would practically guarantee that I'd lose money. And now that I've gotten to know the Angel community, it turns out I wasn't alone. The problem: most Angels attempt to act like sophisticated venture capitalists:angel investor onstartups

a) They seek 10x (or more!) homerun acquisitions and;

b) do follow-on investments (pro-rata or more) often through multiple rounds and;

c) invest in game-changing ideas that are incredibly risky;

d) wait for companies to eventually get sold to see a return.

A more effective model for Angel investing is long overdue. If Angels want to win — they want to lower their risk, create better returns, and help entrepreneurs more they'll do the following: fly lower heights (avoid trying to fund the next 5 Facebooks) and take shorter flights (avoid riding each investment out all the way to the end).

An Angel investor should:

a) aim for a 2-4x return;

b) get out of deals in 1-3 years, selling their shares to VCs at the Series A or B Venture Rounds (and not feel bad about it);

c) Remember that they're playing with their own money versus risking someone else's via a fund they've raised. Angel investing isn't about charity work; if they want to spend money to help others, they should just donate to good causes instead.

Ultimately, it's about following the rules of the investing ecosystem: Angels get things started, venture capitalists create mature, sustainable businesses, and investment bankers sell them. And if we all play by our roles, we're all going to win.

Here's what playing by the rules will do:

  • Reduce Risk. Losing money is rarely because the company goes out of business in the first few years. Rather, it's because the company matures and becomes more difficult to sustain through ups and downs. Getting out early will allow an Angel to get more out, more often.
  • Allow More Companies to Get Funded. The majority of Angels have the ability to invest in just a handful of deals, let's say 10 maximum. Their money is limited, and they don't want to overextend. Assuming some follow-ons, most just can't do much more than that. If an Angel exits from one or two in the short term, that 2-4x return will allow them to help start more companies, more often.
  • Avoid Dilution to Nothing. One of the major issues in Angel investing is that a successful company often goes through many rounds of funding at higher and higher valuations. Often at that stage, VCs don't provide early Angels the ability to invest, and even more often Angels can't invest due to the financial commitment. The result: an Angel is left diluted to a meaningless percentage.
  • Keep In-The-Know. In the successful company scenario, the outcome is even bleaker. The major investors no longer provide early investors with Information Rights (the right to receive financial or strategic facts about the company). So that leaves most Angels with a variety of deals that they're entirely clueless about.
  • Provide VCs with More Ownership. When a company begins to succeed, institutional investors want as much ownership as they can get. Without lowering valuation, this conflicts with founders who also wish to keep as much ownership as they can. One solution: Angels are expected to sell shares to the VCs as part of the round. The VCs get more ownership, an Angel makes money and the entrepreneur doesn't get diluted. Everyone wins.
  • Reduces VCs and Acquirers from Having to Deal with — well, Angels. This is an important one. VCs want clean capitalization tables (less people involved = less headaches) and acquirers don't want to have to deal with shareholder lawsuits or other risks of having a whole bunch of (relatively) unsophisticated investors involved. The less Angels involved later, the better.

Again, this is really just about Angel investors agreeing to be what they really are: small-time investors who want to use their own money to help companies grow. It's a great thing, and it shouldn't be confused with investors who are seeking to deliver returns for the Limited Partners in the funds they've raised.

For this to work, the whole ecosystem needs to behave accordingly. Entrepreneurs need to be supportive of an Angel who sells their shares; venture capitalists need to be willing to purchase shares from Angels during the A or B rounds; and Angels need to know their role.

To the Angels: Aim shorter. Aim lower. And for that, you'll get better returns and support more companies.

Which is the point after all, isn't it?

Posted by Dharmesh Shah on Wed, Jul 11, 2012


Excellent thoughts and reminders. Thank you for the clarity. I hear many people talk about funding and few have the ability to move their ego out of the way to acknowledge they don't know anything about raising capital or when to be in or out of the game.

posted on Wednesday, July 11, 2012 at 11:43 AM by C.A. Morehouse

If only I had asked my erstwhile angels to help me sell their shares to the vcs instead of upping their stake...

posted on Wednesday, July 11, 2012 at 11:51 AM by Thorsten Hoins

Interesting post.  
I'd be interested to learn if there is any available data, even anonymous or in aggregate concerning the # of recent Series A or B rounds that involved early investors selling shares to VCs. 
Tangentially related, what other good liquidity options would early investors have at that point?

posted on Wednesday, July 11, 2012 at 12:00 PM by Ashish

Dharmesh, do you happen to know which websites have the best, and are the most reputable, at putting Angel investors together with companies? We are not a start-up. We've actually been in business for over 10 years but we've just launched a new product for a new market and want to consider investors to help with the launch. Looking for any suggestions on web sites to consider. Thanks in advance.

posted on Wednesday, July 11, 2012 at 12:04 PM by Friendly Songs

Dave: I have an innovative and game changing startup. 
A great deal of work has gone into this and a programmers and marketing expert are working part time to get a alpha vs of software in the can.  
I have a lot of questions about how I retain equity in something that I have worked for several years on. 
This is not solely a shellfish goal as my biggest concern is the requirement for future rounds of funding.  
Have you or anyone else published an article about funding a startup versus how much equity to give up and when. A detailed roadmap would be great if someone has produced one. 
Am I better off giving away equity to unpaid individuals who are assisting me in getting the programming and web design completed or should I limit their participation and give that equity to my angel and compensate them predominately in salary?

posted on Wednesday, July 11, 2012 at 12:07 PM by Michael Slattery

Nicely and succinctly put.  
Discipline over emotion is part of the challenge. When the VCs show up to buy in at a higher valuation it's soooo tempting to be caught in the emotional upswing and say, "Hey, this is great. I'll ride this one. Better yet, I'll double down - an obvious winner!"  
A practice that can help mitigate the sense of getting off the just launching rocket is taking a portion of your money off the table and letting a portion ride. If you are able to double your seed bet by the A-round, you might take 3/4 of it off the table making a nice 25% gain while letting effectively half of your initial investment ride. Invest $100 to double. Then take out $150 and let $50 ride. You've made a 50% gain and might double/triple the rider for the B. (of course, this means carefully structuring your seed - a simple convertible note will trap you in the A and you'll have to wait for the B to exit) 

posted on Wednesday, July 11, 2012 at 12:08 PM by Crick Waters

Awesome insights. Thank you, has helped me gain some much needed perspective.

posted on Wednesday, July 11, 2012 at 12:15 PM by Ashley Allanby

Succinct, relevant and insightful thoughts on the matter.  

posted on Wednesday, July 11, 2012 at 12:23 PM by Patrick Cooper

Well put! Other than a subsequent round of funding, what other opportunities for exit would you recommend to shorter-term investors or equity holders?

posted on Wednesday, July 11, 2012 at 12:24 PM by Chris Ronzio

Awesome perspective. Also the 2x 4x is more realistic in the short-term. Pipe dreams of investing $25-$50k and making 7 figures are rare and infrequent.

posted on Wednesday, July 11, 2012 at 1:09 PM by Dwight Zahringer

Dharmesh - great article. I also think it speaks to the TYPE of investments Angels are frequently seeking. 
This might be heresy to the tech crowd, but not all startups and more importantly not all entrepreneurs have to be in the tech space to produce a viable business and solid ROI. In fact, many outside of that realm come with lower risk.  
I'm one of them. I'm opening a business that's customer-facing in a stable industry with positive cash flow and solid ROI. It's in a market where there is the need and without local competition. It's called bowling.  
Why aren't angels more interested in something with those characteristics to round out their portfolios? Does it lack the "sexiness" they need to be involved? I'll tell you it still will be one hell of a sexy place when it's done!

posted on Wednesday, July 11, 2012 at 1:23 PM by Matt McGoldrick

THIS is the capital gap. Its not about stage of company, its about the rare type of company that can meet the VC's need for a hyper-out-sized liquidity event to off-set the multiple losses incurred from other super high risk portfolio companies. The dramatic increase in business plan competitions, incubators, co-working facilities, etc. has created a host of entrepreneurs with great companies that can make the entrepreneur and their employees lots of money, but it will never reach a billion dollar valuation. What's wrong with that? 
We need an investment model that works for incremental innovation rather than disruptive innovation, and can deliver results for investors and entrepreneurs based on cash-flow focused businesses that can deliver liquidity without a waiting for or requiring a huge IPO or exit. A $100M annual run rate software as a service business operating at a 40% annual margin is a very nice little company in deed.

posted on Wednesday, July 11, 2012 at 1:36 PM by Ken Smith

I wonder how many VC's are willing to buy shares from angels. If they are then that's fine. Otherwise this doesn't work. That's part of why Basil Peter's suggested exiting without VC rounds in his book Early Exits. Well worth a read. 
To Michael Slattery, you might get some guidance from a book by Noam Wasserman called Founder's Dilemmas. For a shorter read, there's an HBR article by the same name. The gist of it is that from his database of 10,000 companies - in high growth areas (that's important) founders who made decisions that kept them more in control of the company ended up with an equity stake that was worth less money than those who made decisions that involved giving up more control.  

posted on Wednesday, July 11, 2012 at 2:29 PM by John Seiffer

Hi Dharmesh, 
Thank you for posting this article. This sounds like logical, sound advice and it is helpful to understand some of the challenges that Angel Investors face and what a potential win-win-win scenario could look like. 
I would be interested to know how many Angels and VCs subscribe to the concepts you write about. 
As an entrepreneur my goal is for everyone who gets involved in our venture to win.

posted on Wednesday, July 11, 2012 at 2:38 PM by Mary Okocha

The article makes no sense and has zero probability of success. VCs don;t make markets for early stage companies and will not buy out earlier positions in companies yet to achieve profitability and positive cash flow. More to the point, if an Angel investor looks for a 2 - 4X return then why would a VC, seeking 10X+ as a mininum return, want to invest in the company. This is a one way ticket to losing all your money in early stage deals. 
20+ years as an investor and i have seen this happen over and over again.

posted on Wednesday, July 11, 2012 at 2:52 PM by steve roth

Dharmesh, I am interested too if you happen to know which websites have the best, and are the most reputable, at putting Angel investors together with companies. I am interested in getting funding for entrepreneurs at my local university in Mexico. Any thoughts?

posted on Wednesday, July 11, 2012 at 3:03 PM by Martha Contreras

For those inquiring which websites are best for connecting with investors, I would advise you to adopt a different strategy. I am happy to discuss this with you in more detail, just email me. andy @ ohdata . com

posted on Wednesday, July 11, 2012 at 3:42 PM by Andy Stewart

Great post Dave. One thing I need to add/emphasize. You mention that angels should shoot for a more modest returns, but assume that those companies will eventually raise VC funding. That's an important thing to remember. Angels investing in companies that are not shooting for big outcomes will not attract institutional capital. That's fine, but you need to think about what other viable financing sources there are, because it usually is hard to get to CFBE on just a seed round.  
I think what you are saying is that angels should invest in entrepreneurs going after huge ideas that will have a great chance of raising VC capital. But that those angels should be able to get liquidity in intermediate financing rounds. WIth that, I agree. But it's far from standard practice to given angels liquidity in a series B or C round unless it's a highly sought after investment.

posted on Wednesday, July 11, 2012 at 4:08 PM by Rob Go

The real issue is whether angel investors want to be in the same space that will ultimately be occupied by VC's. Are there any VC readers out there who would actually buy shares from angel investors? Early money is committed, spent and often going to be diluted substantially. Do VC's really want to reward them, even with just a 2-4x buy-out?

posted on Wednesday, July 11, 2012 at 4:16 PM by Andrew Ellis

Hi Dave, 
Thanks for a very interesting and insightful article. 
You mentioned "Everywhere you turn these days, you find an angel investor" 
We are a UK/India based startup and it's been really tough to find a proper angel investor for funding us irrespective of having customers for our product. Would be helpful if you can ping any pointers. 

posted on Wednesday, July 11, 2012 at 4:51 PM by S S V S SARATH

I think part of the problem is that the expectations here as you have described them (seeking a 10x or even a 2-4x return) are all completely wrong... partly because I don't see a time frame over which those returns are gained, and partly because even if it was stated, the numbers are still entirely arbitrary... why 10x? why 2-4x? ...the fact is, that neither VCs nor so called Angel Investors have a bloody clue why... what they are after is the biggest return they can get, rather than a reasonable return. It is not one inventors fault that you invested badly somewhere else, so why the hell should they pay for it by giving you a bigger share? What you should expect is that their investment returns you at or above a hurdle rate of return, based on what other possibilities exist in the market, and nothing more... it is this greed & stupidity that causes so many problems. You need to bring technical advisors with you to any meeting with an inventor or entrepreneur, and you also need to bring legal (IP law) advisors, both for your benefit, and the inventor's... if you aren't bringing that expertise to the meetings, so that you can: 1 - make the inventor feel secure that their IP will not be stolen in discussion with you, 2 - make yourself feel secure that the IP (if currently unprotected) is none-the-less protectable, and 3 - that the invention/idea is actually technically viable, and if so, exactly how much more work is required to bring it to market... if you haven't brought these things, is it any wonder you keep losing money on bad investments, or investments that were good but it was YOU as the investor who screwed it up by not doing your due diligence? can't walk into that meeting with NOTHING more than money, and expect things to go well, that is just (and nothing more than) a gamble... and you can't expect the inventor/entrepreneur, who is already an expert or visionary in whatever field their inventions / ideas relate to, to ALSO be a business genius if you are not; that is what YOU ARE SUPPOSED TO be bringing to the table... and without it, you are nothing more than a wallet.

posted on Wednesday, July 11, 2012 at 5:48 PM by Trevor Rose

Hi Dave , 
Good Post , 
We had some dealings with Angel investors and found it way to difficult to with them wanting to much input in the day to day running of the business with minimal experience to offer and wanting a Huge chunk of the Business .We are dealing with VC's Now and although you have to be Really aware of them trying claim too much % of the company and everything else 3-5 yrs down the track Big investors (through a VC They have a wealth of experience to draw on if you select The right ones - That said ,You really need to stay on the ball with your VC company - The initial Contract especially - offer documents etc. before you sign of on anything have an independent & your Lawyer review it Carefully .It's seems if they can find a way to make more money of you they will .I tore the contracts apart from various VC's - much to their shock - things they will try - receiving % on the revenue you generate of the next 3-5 yrs ,5% commission if your company sells including the entire Value of the company ,IP'S , everything , Before you hand over any money for Fundraising Read the fine print we have met many entrepreneurs who had parted with 30k plus with nothing to show but an empty bank account and broken dreams left in tatters.

posted on Wednesday, July 11, 2012 at 7:26 PM by Marie Jane

Good article - I wrote something on Angel Investing only the other day as well. Please have a look. 

posted on Thursday, July 12, 2012 at 12:45 AM by Simon Clark

Very good idea is to invest into something producing real money. I really hate thousands of these "virtual good" bullshits. 
Just wake up startups, try to make some real business, producing real money!

posted on Thursday, July 12, 2012 at 2:35 AM by Igor

Dear investors 
Investments in the real economy. Consulting company "International Business School" (Kiev, Ukraine) 
I want to become a joint venture in Russia or Ukraine for the production of medicines, substances or cosmetics. The tax regime in Russia is more favorable. 
We have our scientific and industrial base. 
We have experience in developing, manufacturing medicines and work with the distributor. 
Can produce your products at our manufacturing base. 
Yours Sincerely, manager Vladimir. 

posted on Thursday, July 12, 2012 at 3:03 AM by Vladimir

If I wanted a 2x return, wouldn't I be better off investing apple, or a 4x return, apple? The reason I expect a home run with angel investing is because all these companies with great businesses aren't going to justify the level of risk/reward, unless the reward is big. It's just a part of modern portfolio theory. The best returns are actually achieved with less risky assets. So to "beat the odds" you have to be at least in the right spot. It is very hard to get appropriate reward for the risk if you're aiming for 2-4x. The margin of error is much less. It may be "safer" going for 2-4x than going for 100x, but so is getting a target date fund. Odds are bad, but at least you have a chance with a swing for the fences strategy. Personally, I like the idea of going for singles, not just home runs, but those businesses better be perfect.

posted on Thursday, July 12, 2012 at 3:07 AM by Ken

After all, it's called angel investing, not banking.

posted on Thursday, July 12, 2012 at 3:09 AM by Ken

Dave is right. He not only did this for his angel investors but he has been smart with his own investing. The old model of VC's expecting follow on investments by earlier investors, however, is the risk to many angels. VC's should be willing to cash out angels to make the system work well in the long run.

posted on Thursday, July 12, 2012 at 10:16 AM by john

Here is an article I wrote last year which people really seem to connect with

posted on Thursday, July 12, 2012 at 2:27 PM by Andy Stewart

Just posted about this on 
Also take a look at a different strategy (that I use) that has some overlap.

posted on Thursday, July 12, 2012 at 2:40 PM by Brad Feld

Nope. Angel investing involves taking ultra-risk capital and going for ultra-reward levels. Your conservative strategy doesn't fit that at all. 
Also, many of the rights you assume are given up when VCs are involved are a result of entrepreneurs not going to bat for the folks who got them to the VC table -- the angels. Best to figure out what kind of people the entrepreneurs are BEFORE any investment. Avoid those that willlimit rights.

posted on Thursday, July 12, 2012 at 3:01 PM by Ray Burt

Interesting article, and I like the direction. However, I have one serious question as it relates to fund raising and an Angel selling out. 
I've been on all three sides of the equation; an an Angel investor (usually in my own companies), taking Angel dollar, and dealing with institutional investors as well. 
Let's say the scenario is a company wants to raise $3 Million on their round. 
That means there is a need for capital, and use of proceeds attesting to such. 
If the Angels had invested $500,000k and want to "cash out" in the A or B round, that would mean either the company needs to raise "more money", and would take less in the proceeds. 
So, I understand the dilution and valuation argument, but in the end the company either takes less money, or raises more and still suffers dilution.

posted on Thursday, July 12, 2012 at 6:30 PM by Stephen Meade

A very interesting article. I,myself, have never heard of Angel investing and after reading your article can see that in any investing a person must do a thorough study before just jumping in with both feet. All investing is tricky you need to do your homework....

posted on Friday, July 13, 2012 at 9:03 AM by Kay Bauer

More thoughts: 
- Help your startups on a regular basis. Good deeds will come back to you in form of great dealflow or a founder's interest in keeping you emotionally and financially involved. 
- try sell your rights (for example pro-rata) to VCs to recoup money early. 
- lifestyle companies might be interesting targets if your exit is a bank loan with a 3x liqui paid back over time from profit, or dividends from preferred shares (both highly unlikely with regular VC deals) 
- doing your prorata and acting like a regular VC actually does make sense for your 1 out of 20 investments that becomes your star and favorite: cash out of mediocre successes or too-slow-for-you progress or touchy founder relationship or whatever else drives you out, and focus your finances on the one superstar you love more than the others ;)

posted on Saturday, July 14, 2012 at 12:01 AM by Thorsten Claus

The problem w/ lower return rates is you now need higher success rates from your investments. If you're only getting a 2x return you need a 60% success rate to obtain positive cash flow.

posted on Saturday, July 14, 2012 at 10:24 PM by Chuck Stephanski

Good post Dave. Angel investors are everywhere and a new model is needed. However lowering the expectations of the angel is not a solution. 
The solution is a publicly traded vehicle that allows for liquidity whereby angel investors can get in and out as they please. 
I have created such - Webtradex International Corporation trading on the otcbb - trading symbol ZDVN. 
For more info - please reach out to

posted on Sunday, July 15, 2012 at 7:26 AM by Jeff Robinson

Wow, very informative article! Learned a lot! thanks!

posted on Tuesday, July 17, 2012 at 10:58 AM by chris@Bristol Builders

Wheh! I used to invent in structured companies. We spent our money and took the profits. Now I have my own invention that requires very little seed money and will provide patent protected, huge returns. It's just chemistry and engineering;nothing fancy. How do you find the angel?

posted on Tuesday, July 17, 2012 at 3:02 PM by Fred Teumac

Easier said than done!

posted on Tuesday, July 17, 2012 at 11:35 PM by Philo

Hi everyone, 
absolutly perfect article. Thanks for the insperation.

posted on Friday, July 20, 2012 at 11:49 AM by Timm

Really very informative article on role of angel investors & how everyone going to win.  
The second good point company fails not because of sustainable business model it's because the company matures and becomes more difficult to sustain through ups and downs 
Never heard that VC's and Institutional Investors hide information from angel investors in order to have as much ownership as they can get. 
A great post on effective model of Angel investing

posted on Tuesday, July 24, 2012 at 3:29 PM by Tushar

Never been a better time to invest in engineering companies.

posted on Wednesday, July 25, 2012 at 7:13 PM by ADI Pumps

This post is spot on. I'm seeing this all the time where everyone wants to invest in another facebook and then they're let down because the investment didn't yield that much. 
<a>"">IT Services

posted on Friday, July 27, 2012 at 6:18 AM by Gilbert

Amazing post! very informative article indeed. Cleared a lot about the roles of the angel investors 
Thank You

posted on Sunday, July 29, 2012 at 9:44 PM by Mohamed Anan

Thanks for all the tips, links, and advice! Will summarize them all for an entrepreneurs class I am planning to teach.

posted on Saturday, August 04, 2012 at 6:35 PM by Martha C

Particular conversation act components relevant to spoken and also actual physical transactions are extant in the past as well as today.

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