Lessons from my first 18-months of Angel Investing

I started angel investing in January 2021 after a 4-years stint as COO of Fuzu, a career-development start-up in Kenya. After leading 200+ investor conversations as part of Fuzu’s Series A, I figured it would be fun to be on the other side of the table. Plus, angel investing was a great way to quickly explore different industries and build conviction on what I wanted to do next in my career.

Four months (and a few investments) into my journey, I raised a micro-fund to increase my ability to deploy capital. So far, I have invested $350,000 across 10 companies and two portfolios: an Africa portfolio and a Future of the Mind portfolio.

As expected, venture investing has come with a steep learning curve and I am just a few steps into a much longer march up the mountain. As I pause to reflect on my foray into angel investing, I decided to launch a 3-part blog series. In the first article, I will share my learnings from the past 18 months. In the second and third articles, I will share my revamped fund thesis based on these reflections.

There were two motivations I had in mind when writing this first article:

1. I want to share my learnings with other angel investors who are early on their journey or may be looking to write their first check. Angel investing has made me a much better entrepreneur and I encourage anyone interested in the start-up world to consider angel investing (even at tiny check sizes).
2. I hope to get feedback and input from more experienced early-stage investors. It’s called an Investment process for a reason — it’s iterative! The only way to get better is to keep learning, evolving and growing, and I hope that this blog series will serve as a catalyst for just that.

With this in mind, let’s kick off this series by going over three major things that I wish I had done when I started out as an angel investor.

#1: I wish I narrowed my scope quicker & invested into companies where I truly understood the go-to-market (GTM) dynamics of the industry

The moment I added “angel investor” on my LinkedIn and joined angel communities, the floodgates of deal flow opened. Deal flow is a great thing for any investor, but I wasn’t ready for it. I received hundreds of flashy decks with innovative solutions to important problem statements and massive total addressable markets (TAMs). I quickly learned that it’s all too easy to get caught up in the hype.

Taking the time to build true conviction on an opportunity is hard. Instead, I observed myself fall into many “lazy” investor traps:

• “Look at all of the big name investors, it must be a slam dunk!”
• “The valuation is so low, you just can’t say no to the deal”
• “This is such an exciting trend in such a hot industry, all I need to believe is that it will reach Series A/B/C so I can exit”
• “Even if it doesn’t work, at least I will learn something new”

As an investor, I find it is easier to audit the product than the growth strategy. It is more tangible. But for most early-stage companies (not all), the GTM plan is the most important part of the investment case. Justin Kan famously tweeted: “First time founders are obsessed with product, second time founders are obsessed with distribution”. The same is likely true for investors.

Many founders know how to tell a good story around growth. But many, especially first time founders, are naïve about the growth assumptions and what it takes to build a real growth engine. They are not trying to deceive, but they often don’t know either. My conversion rate in industries I know well (Edtech & SaaS) has been 10 times lower (!) than those I didn’t know as well at the time of investment (everything else). It is much simpler to build an investment case in a company where you can’t challenge the fundamental drivers of the business on a first order principle basis. You simply can’t spot the false assumptions — you just don’t know what you don’t know.

Full-time investors can take the time to build conviction on new industries and new geographies. As angel investors who are doing this as a side hustle or for fun, we don’t have that luxury.

If you are thinking about going into angel investing and looking to make a commercial return (which may not be the case for some), I would suggest to narrow your initial scope to the 1–2 industries where you understand the first order principles of the go to market and then add only 1–2 investment themes at a time. Don’t spread yourself too thin. It may seem obvious, but few angel investors do this well. The opportunities are oh so tempting!

As for me, this lesson means concentrating my full attention on the Future of the Mind. This is an area that I am extremely passionate about and believe will be one of the most transformative areas of innovation over the next 2–3 decades. I will share more about my revamped thesis in the next article.

#2: I wish I built an objective framework on Day 1 to avoid emotional decisions and keep me focused on the big-picture opportunity

Information overload has been one of the biggest challenges I have faced on my investing journey. It is easy to get lost in the details and as an operator, I was especially vulnerable.

I recently rolled out a new framework to help me focus on assessing the big picture. If I don’t have strong conviction on the opportunity, I don’t look at anything else. None of the details matter.

My opportunity score consists of two questions. I assess each on a 1–5 scale:

1. Can the specific problem statement yield a 20–50x venture outcome?
2. Is it a winning founding team that can move fast?

Sounds obvious, but I have found these questions much harder to assess than I expected. And there are a few counterintuitive things I have picked up along the way that has changed how I seek to answer these questions.

Specific Problem Statement vs. Solution Set

I used to spend a lot of time assessing the solution set when building the case for a potential investment. But after seeing my portfolio go through a number of pivots, I now spend all my time trying to learn from founders about the details of the problem statement. I ask myself 4 questions:

• Is the specific problem statement narrow enough to enable a 10x better solution for its customers?
• How much do the founders know about the specific problem and the buying psychology of their potential early adopters?
• Is there an existing, high-intent purchase pathway for this problem that will serve as the foundation for the go-to-market?
• How big is the problem statement market (incl. all indirect competition)?

I find these questions give me a much better understanding of both the long-term potential of the company and its ability to gain initial traction and make it through the valley of death. I only look at the solution to get a sense of the clarity of thinking of the founding team. The solution will (almost) always change and/or expand.

Speed + structure — the perfect founding team

An early trend I am noticing is that the winning founder combination is a fast-moving (at times chaotic) and inspirational leader as the #1, with a structured, slower and more thoughtful #2 to counter balance. I have come to appreciate velocity of action as a key indicator of success. Despite my own personal tendencies to be overly structured, I started prioritizing speed over structure when assessing founding teams. The reverse combination does not seem to work as well for most problems statements — the entrepreneurial heart of the leader is critical to ensure continuous momentum through the ups & downs of the start-up journey.

A Market + B Team is better than an A Team + B Market

I used to think that the most important factor in a venture’s success was the team, especially for early stage opportunities. A strong team certainly reduces the risk of any investment. But in venture investing, the goal is to achieve a 20x+ outcome from a small subset of investments. I have seen many strong, investible teams tackle problem spaces that are to small to lead to a venture outcome. Problem statement markets for which if all the core assumptions of the business case hold true and with perfect execution will not reach a 20x outcome. I have realized that most problem statements are not suited for the venture model. There are many other forms of investment for which this statement would not hold true. But for venture investing, I’ve come to realize that the problem space is a bigger driver of success.

At early stages, opportunity trumps risk. Recently, I started shifting 90% of my investment time to build conviction on the opportunity score (previously 50/50 at best). But risk does matter. There are many unknowns. My goal is to find opportunities with fewer critical must-believes for the company to reach meaningfully scale (Series B/C). Over the past few months, I have rolled a 7-point framework to assess the risk profile. I assess each pillar on a High (-2 points), Medium (-1 point) and Low (0 points) scale.

1. PMF Risk: does the team understand what it takes to reach PMF? Are PMF metrics in their current OKRs? How close are they to PMF?
2. Competitive Risk: does the solution have a clear long-term moat or unfair sustained competitive advantage? (Note: I try not to over index on current competition. Every big opportunity will have big competition in the medium term)
3. Product Risk: is a quality product already in the market? Is there a clear product roadmap / vision? How strong is the tech and/or product team?
4. GTM Risk: Is there a proven distribution playbook? Is there someone on the team that peaks on growth?
5. People Risk: Can the founders recruit rock-stars? Is there a compelling people strategy that will retain rock-stars? Do key team members have enough equity to stay long-term?
6. Fundraising Risk: will the company need significant funding to fuel growth and win in a competitive market? If so, do the founders have the confidence, skill set and connections to keep raising big money?
7. Regulation Risk: are there regulatory or other existential risks outside of the control of the founders that can slow down or kill the company?

To pull the final assessment together I combine the opportunity score (up to 10 points) and the risk assessment (up to -2 points for each pillar). For any company with over 2–3 points, I typically move forward with an investment.

It is a very simplistic and unscientific approach. I am still learning how to best ask the right questions to assess each of the core pillars quickly and accurately. But so far this framework has allowed me to make objective decisions and avoid the many emotional biases of the investment decision process. It is too early to draw conclusions, but subjectively, I believe it has helped me build stronger and faster conviction on my recent investment decisions.

A few takeaways for those looking to get into early-stage angel investing:

• Avoid spending too much time on the details until you assess the opportunity
• Try to pull together an objective framework to remove emotional biases from your investment process. Feel free to use my framework as a starting point and improve on it (but please do share what you add)

What am I missing? I would love critical inputs to my very ‘Work in Progress’ framework.

#3 I wish I had experimented quicker with building a process that enables me to build strong conviction while still being founder friendly

Being both diligent and founder first can be difficult. I find the traditional investment where you bombard founders with the same 10 questions they have each answered 100 times, both judgmental and unfriendly. As an angel writing a small check, you don’t want to take too much time from the founder making it hard to get enough face-time to build real conviction. But as a new investor, that was my starting point and I kept at it for the first 12-months.

Over the past 6-months I have started experimenting to find the right balance between being founder friendly and facetime to build conviction. I continue to review and iterate monthly, but my current 3-step process has been working better.

1. A 45-minute introduction call to cover the problem statement & team and assess an initial opportunity score. I continue to the next session if the score is over 7 points (out of 10)
2. A 60-minute thought partnership session on a topic that is top of mind for the founder. I let the founder choose the topic and ask for any relevant prep materials to better understand the context before the call. This session is a chance for me to understand how the founder thinks, how well we would work together post investment and most importantly gives the founder a chance to interview me. I strongly believe that each angel ticket should add value to its portfolio. At the end of the call I ask for buy-in from the founder — do they want to “hire” me as an investor based on the value added during the working session. If the answer is yes (which is not always the case), I feel more justified in asking for additional time from the founders to finalize my process.
3. I schedule additional sessions as needed to build conviction on the rest of the opportunity and risk framework. But I only ask for more time once I have already added value to the founder as part of the process and try to keep it as quick and transparent as possible.

I would encourage any new angel investor to build an investment process where they can add value to the founder during the process itself.

Wrapping it up

Angel investing over the last 18 months has been an iterative learning experience. I learned the hard way through lots of trial and error, but for new angel investors, I would encourage you to:

• Narrow your focus to 2–3 industries from Day 1 so you can build conviction on a few investments themes vs spreading yourself too thin
• Avoid spending any time on the details of an investment case until you fully assessed the opportunity
• Pull together an objective framework to assess both opportunity and risk to remove emotional biases from your investment process
• Build an investment process where you can add value during the process itself to build the foundation for a strong founder relationship

Thanks for reading my first ever blog post!

I would appreciate any input on my framework or investment process — I am sure there is plenty I am missing. If you have any questions on any part of the framework let me know. I will do my best to answer quickly.

In part two of this blog series, I will be providing an overview of the key players, sectors, and opportunities in this exciting new space. Stay tuned!