AngelMoney

Lesson #1: Seed-stage venture investing != angel investing

Note: this is part of a series of posts unpacking what I’ve learned over the past four years as a professional investor.

Looking back, it seems so obvious. But the #1 lesson learned from my past four years as a “professional” venture investor has nothing to do with how I evaluate people, companies or ideas.

Instead, it’s a fundamental shift in my understanding of my role as an investor.

When I first began investing on behalf of our new fund (Founders Co-op), I unconsciously viewed the world through the lens of an angel investor.

Andy and I had each been active angel investors before deciding to raise a fund together, and our positive experience as individual angels helped convince us that running a fund would be a fun way to keep working together as partners after we sold Judy’s Book.

Most of our limited partners (or LPs, the investors in our fund) were active angels themselves, and their referrals helped us build our initial funnel of early-stage deals in the Pacific Northwest.

I’m proud of the deals we did in our first fund, and love spending time with the entrepreneurs we’ve been able to back on behalf of our LPs. But I’ve also noticed a steady shift over time in nearly every aspect of our fund operations — from how we source deals, to the types of deals we tend to get excited about, to the nature of the financings we participate in, and even to the types of firms we seek to co-invest with.

It’s taken me two fundraising cycles and more than 30 fund investments to get my head wrapped around it, but it’s now obvious to me that…

Angel investing and venture investing aren’t just different in scale, but fundamentally different in type.

Why is that so?

Let’s start with a definition:

What does it mean to be an “angel investor”?

Setting aside the emerging universe of quasi-institutional “super angels” and “Micro VCs”, I define the “typical” angel investor as:

  • an individual who invests personal capital in relatively small quantities, 
  • based on irregular / opportunistic sources of deal flow, 
  • with limited capacity / appetite for operational oversight of their invested companies 
  • across a relatively small number of deals.

      So why isn’t venture investing just a scaled-up version of angel investing?

      There are many reasons, each one requiring a blog-length post to really explain. To avoid a terminal tl;dr problem, I’ve listed the headlines below and will be linking out to each supporting post as I find time to take a swing at each. The first three are:

      1. Loss Aversion vs. Gains Maximizing
      2. Local vs. Global Maxima
      3. Investing Capital vs. Investing Time

      These are by no means the only differences, but they’re the ones I keep coming back to when trying to explain — to myself as well as to others in our wider Founders Co-op community — how my thinking has been shaped by my experiences as an investor.

      As always, comments and feedback help me get smarter — please jump in below to share your experience, ask for a clarification or tell me why I’m an idiot.