9 Principles for Angel Investing

What's up, everyone? This is Alex Lieberman, Co—Founder, and Executive Chairman of Morning Brew. Welcome back to Founder's Journal, my personal audio diary, where I give you, the business builder, the tools you need to think better in order to build better, whether that's building a business, a team, or a new product. If last episode was the appetizer, this episode is the entree. I'm going to share my current angel investing strategy and the principles that guide how I ultimately will find success as an angel. Let's hop into it. 

So, the last episode, I told you about how I was introduced to angel investing and my thought process for the first three angel checks that I wrote.The first one was in an apparel brand, the second one was in a sneaker community brand, and the third one was in a dog park brand. This episode, I want to share with you how I evolved my thinking as an angel, beginning with the macro game that I'm playing. So to give some context, I made those three investments that I mentioned last episode, and soon after that third investment, I had this sort of coming to Jesus moment that I think a lot of angel investors have, where I realized that I was actually putting a pretty significant amounts of money into angel investing and this wasn't monopoly money. The reason I had that realization is that, while I was being thoughtful about the investments that I decided to make, I didn't have a big picture game plan.I didn't know what percentage of my net worth I wanted to allocate to angel investing, I didn't know how many checks I wanted to write, I was really just looking at things on a deal by deal basis, versus thinking about my angel investing strategy as a whole. 

Now, the problem with this is that angel investing is really risky. And the way that I had been doing it was the riskiest form of angel investing, which is writing a few checks over a long period of time. So I took a step back and basically said there are three ways for me to get involved as an angel investor. The first is to write individual checks, but in way more companies than I am now, so that I diversify my risk and give myself a chance to make a return. The second is to write checks into funds that invest in startups, basically where I'm a limited partner——it's a more passive relationship when you get more diversification. And the third is to start a fund myself. 

So I decided that right now, number one, and number two sounded best to me because I didn't have interest in being responsible for other investors money and effectively turning my passion into a job, which is what happens when you start a fund. I haven't yet written checks into funds as a limited partner, which is option number two that I said, so I'm not going to talk about those learnings there yet because there haven't been any. But on number one, my strategy for writing individual checks into companies is to write 10 to 15 angel checks over the next 12 months. My guess is that I'll invest in 10 to 20% of companies that I talked to, which means that I need to speak with 50 to a, a 150 companies to be able to make those 10 to 15 investments. So that's my strategy. And while I'm just five investments into this, I've learned a ton of important lessons already about the skillset of being an angel. Lessons that I think can be applied to early stage companies investing broadly, and honestly, some lessons that can be applied far beyond that as well. So here are my nine principles that I follow religiously as an angel investor.

Principle #1: Angel Investing is an Investment in Yourself

Principle one: active angel investing is an investment in yourself, not just an investment in the entrepreneur and the company. By surrounding yourself with other energized big thinkers, it brings out the greatest creative energy in yourself. And also, you basically get a supercharged MBA because as an angel, you get access to insights, data, challenges, all of this information, private information, that entrepreneurs are experiencing at various stages of their company's life, and you get to take part in helping entrepreneurs think through these various challenges and priorities. You don't have that aperture into business in kind of any other setting.

Principle #2: Adding No-Bullshit Value Differentiates Investors 

Principle number two: capital doesn't differentiate most investors, adding no-bullshit value does. Unless you're a tier A venture capital firm, like Tiger Global, that can give more capital faster than anyone else, you're not going to build a reputation as an angel investor through the checks that you write. Value can range from introductions to potential employees, to you advising on topics within your circles of competence—so for me, it would be advising companies on audience, building, marketing, and distribution. You can also help connect the founders to other investors for future rounds. But when you think about it, this is why I find so much value in building up an audience on Twitter and LinkedIn, because this is just yet another way I can add value to my portfolio companies, by having a platform to amplify the businesses that I invest in.

Principle #3: Don’t Act on Deal FOMO

Principle three: it is so easy to feel and act on deal FOMO, but you can't do it. When you see friends invest, that should not impact your conviction. If you act on FOMO, all it means is that you're going to have friends to cry with when a business fails because of your incomplete decision-making. 

Principle #4: Look for Special Founders

Principle four: look for special founders. There are a few need-to-haves and a few nice-to-haves to find a special founder. Every founder I invest in must have four characteristics. They are an obsessive thinker. They wake up thinking about their business. They go to sleep thinking about their business. This doesn't mean they work 15 hour days or burn themselves out, but they are obsessed with the puzzle that is their business. They are also super self aware. The biggest blind spot in business is when people have a lack of awareness. Great founders know what they're really great at, they know what they're really not great at, and they hire into weaknesses and they double down on their strengths. The third: they think for themselves. Great founders are disciplined about taking in information and working up from first principles to form views and opinions of the world. Do they draw inspiration from other investors and entrepreneurs?

Absolutely. But they don't follow the views of other people blindly. They are optimistic, but realistic. I love founders that have a belief in themselves and a belief in their business that they'll be able to figure out a way to succeed no matter what. This doesn't mean they can be blind to the facts, but it means that they'll fight for their business until the bitter end. 

And then there are a few nice-to-haves. First, when it's not a founder's first rodeo, when they've been battle-tested, when they've tried building a business before, they can just see around corners and plan for the future better than first-time founders. Number two, there's an X factor that a founder is fighting for or something that creates a chip on their shoulder. For me, it was building Morning Brew partly for the reason of having to provide for my family, because my dad was no longer around. It's not a requirement, but an extra fire under a founder's ass can be a really powerful thing. The third nice to have: they are a customer of their products. In the last Founder's Journal episode, I talked about my investment in this sneaker community, and one of the biggest advantages was the founder of the sneaker community is a sneakerhead himself, so he was his customer, he knew what his customer was looking for. 

Principle #5: Journal Every Investment you Make or Almost Make

Principle number five in angel investing: decision journal every investment that you make and every investment that you're close to making, but don't pull the trigger on. The best way to learn from your experiences is memorializing your decisions, so the facts are the facts and you have the ability to judge the facts in the future. Just like I decision journal big decisions at Morning Brew and big decisions in my life, I document every investment that I've made with why I believe in it and where things could go wrong.

Principle #6: If You Don’t Understand the Business, Make Sure Another Investor Does

 Principle number six: if it's not in my circle of competence, which for me is media marketing and community building, I make sure to only invest if there are people investing alongside me that do have competence in the core offering of the business. Here's what I mean. A few weeks ago, I was looking at a machine learning startup. I really love the founder, he was super persistent, super gritty, had been building for a long time, self—taught, and I think it could be massive. But I just don't fully understand the business. And if I don't fully understand it, how am I going to be able to make a thoughtful decision around it? I didn't know any other machine learning experts in the round to be able to get a sanity check from them, so I decided not to invest. This business could end up being big and I hope it is, but I just didn't understand it enough to put my money into it. 

Principle #7: Don’t Invest within 24 Hours of a Pitch

Principle seven: don't make an investment within 24 hours of talking to a founder. The best thing about founders is their passion and energy about their business. It's why I love angel investing. But passion and energy can only take a business so far, and there are far more fundamental questions that you need to answer as an investor before writing a check. Things like, do they demonstrate the traits of a special founder, like we just discussed? What's your view on the market? Are they building a special product? There's this advice that Seinfeld always talks about where he writes his joke, but he never judges his joke within 24 hours of writing them, and I think that is such good advice. Your best, most clear, or, at least, emotional thinking happens once the initial excitement subsides.

Principle #8: Don’t Over Complicate It

Principle number eight: don't overcomplicate. As an angel in pre—seed, seed, even series A companies, you're generally not doing financial analysis. Many of these businesses are pre-revenue or just starting to drive revenue. What you're really doing is founder and vision analysis. Beyond looking for the special founder that I just described, I'm always asking myself, one: is this a big and growing market? And two: is this business delivering a product that is orders of magnitude better? These very simple questions, like two or three questions, I would say inform 95% of my view of a startup's potential for success.

Principle #9: Invest in Shit You Want in the World

The ninth and final principle in my current angel investing strategy: invest in shit that you want in the world. Just because a business could be massive, and because I think a founder is a special founder, doesn't mean I should invest. If the product or service isn't providing something to the world that I am proud of, then me investing is basically just saying, I value my own wealth over the wellbeing of the world. That's not a great feeling and not why I want to be backing entrepreneurs. As a very simple example, Juul is a very valuable company, even after the valuation was cut a lot. I wouldn't have angel invested in Juul, even if I had the opportunity.

I Want to Hear From You

And that's my current strategy and my Nine Principles for Angel Investing. If you have any questions about these principles, or if you have thoughts for other important things that I should, that I should consider when investing in startups or investing broadly, shoot me a message. Send an email to alex@morningbrew.com or DM me on Twitter @BusinessBarista. And by the way, if you love Founder's Journal and you want to get some Founder's Journal content by email, also, the original bread and butter of Morning Brew, go to FoundersJournal.MorningBrew.com and you can put your email address in and you will start getting content from the Founder's Journal very soon.

Thanks so much for listening to Founder's Journal, and if you enjoyed it, please let others know who you think would enjoy the show as well. Thanks again, and I'll catch you next episode.