Fantasy Angel Investing

At the start of 2018, Spearhead created a blog post about angel investing lessons.

One of the lessons was:

10. Play fantasy football
Build your instincts by looking at startups without investing. This will build up your instincts, which are what you use to make investment decisions. And you need a lot of data to build up your instincts.
In the old days, you had to work at a VC firm to see dealflow. You had to make a few investments and lose money before getting good judgment. John Doerr famously called this “crashing a fighter jet.“ First you lose $25M, then you have some judgment.
Now you can get judgment without crashing the fighter jet. You can see dealflow from your friends, your incubator, demo days, and AngelList. Write down what you like and dislike about each deal and see how your judgment develops over time.
Wish your angel investor was as badass as this?

I’ve been building my own virtual portfolio by tracking startups and writing my decisions in Apple Notes since 2014. For the last few years I wanted to systematically do this for every startup that has recently graduated from top incubators. After reading the blog post by Spearhead, I decided it’s time.

Because incubators have so many graduates it was hard to continue playing this game on Apple Notes. I looked online and couldn’t find any resources to keep track of virtual investments, so I decided to create a Google Sheets Document. [1] I’ve gotten some inspiration from Farnam Street’s Decision Journal.

Here is the information I included in my spreadsheet:

  • Company Name
  • Website
  • Date
  • Mental/Physical State (Observe your mood and its effect on your decisions)
  • Where you found them (To keep track of your best deal sources)
  • Research Process (Looked for 2 minutes vs living with the founder for a month)
  • Likes
  • Dislikes
  • Expectation (What are the possible scenarios that could happen to this company?)
  • Decision (Invest: Yes? No? Why?)
  • Portfolio % (Percentage of yearly investment fund to dedicate)
  • 6 Month Review (What happened? Did they grow? Die? Get a16z funding? Exit?)
  • 1 Year Review
  • 5 Year Review

Spreadsheet URL

Your product is decisions. By and large, your success will be the sum of the decisions you make over your career. The problem is it’s not easy to get better at making decisions. Source: Farnam Street

I included 2 examples and entered all launched companies from the YC 2018 summer batch.

I use different spreadsheet tabs for startups I tracked previously and for incubator batches. I learned a lot since playing this game and will share them to set expectations.

Examples of Insights You Can Gain

Here are some key insights I had after playing this game since 2014:

  • “Wow, these guys are the luckiest people in the world!” — Whenever I had this thought the startup went on to do great things. As an entrepreneur, I know how hard it is to distribute your product, so when I usually think someone is lucky, they happened to find a great way for customer acquisition. If they achieved product-market-fit and found a way to distribute (by luck or not) then it is a great investment.
  • “Wow, I could never achieve that!” — Whenever I had this thought, it meant that the founder is either hustling hardcore, or built a very challenging technical product. This is usually a sign of a good investment. But for hard technical products I should triple check the market need, because often there is none.
  • “I use this product everyday so I should invest” — This usually sounds like a good idea, but sometimes the founders just want to keep it as a lifestyle business and do not want to grow the business too much.
  • “All my smart friends are using this product fanatically” — Sometimes I might not get it, sometimes it may take a few years for me to understand a product, but if my smart friends are using a product it is usually a good idea to invest. In my experience this category produced great returns if it wasn’t a lifestyle business.
  • “A great founder who failed a startup before is starting a new business” — All founders work on bad ideas and even fail with good ideas, but great ones can suddenly hit it big in their next idea.
  • “I don’t know anything about the market, but this product looks cool!” — I thought investing in any of these startups would turn out to be bad choices. But virtual investing outside of my circle of competence was almost as successful as the ones inside my circle of competence. What’s going on? Do I need more data? Are there other forces at play here?

Another interesting thing I realized is that I’ve been playing this game since 2014 and none of my virtual investments exited yet. This is a serious realization of how long it takes to see returns. [2]

Example of Going Through All YC 2018 Summer Startups

I set up a timer and gave myself 2 minutes to evaluate each startup. That’s how long startup pitches take on their demo day. Then I researched the startup and noted the places I looked in the “Research Process” part of the spreadsheet. Some examples:

  • Read TechCrunch article
  • Checked out the website
  • Checked out their Product Hunt
  • Checked out their AngelList
  • Checked out their LinkedIn
  • Checked out their Github
  • Checked out their Twitter
  • Checked App reviews/installs

2 minutes isn’t enough time to check all of these materials for all startups. I usually picked the top 3–4 relevant ones depending on the startup.

Here are some observations I made about my judgement process after checking 46 startups:

  • Feeling hungry, feeling full and amount of time worked in a single session has a serious effect on my judgement capabilities.
  • There are some product ideas, markets and founder types I can’t relate to and I don’t feel inclined to invest in them even if they seem to have a great business. [3]
  • I am less interested in making investments to startups operating in markets that I know well because I can foresee exactly how they will die. However, if it is a market I know and see a lot of potential, I will make a high % investment.
  • I am more optimistic about markets that I don’t know because I am unaware of the challenges the market presents. This optimism might be a huge strength or a huge weakness. We will see how it plays out and I will share my results in an update later.
  • 2 minutes seem to be enough to get the gist of a startup and decided whether you are interested. But it is not enough to make the final decision. Often I need to do a screening for founders, use the products, ask a knowledgeable friend about the product or the market. [4]
  • A better investment process would be something like: 2 minute screen, 10 minute check the website in detail, 10 minute check founders online presence, 10 minute use the product.

Out of 46 companies here are my investment results:

  • I know the market, I will use the product, I can provide value, I think they’ll succeed: 3 startups — 5%
  • Looks good, but I’m not super confident: 12 startups — 2%
  • Looks good, but I’m not confident: 10 startups — 1%
  • No, won’t invest: 21 startups — 0%

Investing in 25 out of 46 companies seem like bad investment ratio, but:

  • I haven’t done enough checks to discover their red flags
  • I don’t have all the information yet, like amount already raised or market cap. A lot of the deals would probably be just too expensive to invest.
  • I’m unlikely to be able to close the deal for all the companies I choose to invest in. The founders are going to prefer Sequoia over most angel investors.

With the above 3 points included, realistically I would only be able to invest in about 20% or 3–5 companies in this batch.

I hope the concept, spreadsheet, my examples will be helpful to anyone who wants to get into angel investing.

Have any ideas on how to improve the spreadsheet or feedback on my process? Please reach out to me via comments, twitter or email. [5]

Notes

  • [1] All professional investors probably have their own private version of this document. It would be great if some of them could give feedback to improve this tool.
  • [2] This is one of the reason all my current investments are in cryptocurrencies.
  • [3] How do investors say no to founders they don’t like? Ghosting? We’re not a good fit? Honesty?
  • [4] I did make 2 minute decisions on each startup anyways. Or this process could have easily taken weeks.
  • [5] I didn’t open source my own spreadsheets filled with data and comments. The reason is I wanted to be able to comment freely without thinking about possible repercussions by sharing my opinions online. But if you reach out I might show you parts of it. Or most of it if we meet.

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