The past few weeks there have been a lot of discussions around angel investments. Sophia Bendz from Atomico shared some thoughts on angel investments and Sifted recently shared another piece on how to make a smart angel investment. I love reading about others’ experience, and wanted to share some of my own thoughts. A lot of people reach out to me wanting to get into angel investing. My simple recommendation is: don’t do it!

Why is angel investing a bad idea?

Reason #1: Your incentives are misaligned on amount and time of return
Early stage companies are in constant danger of dying. Most early stage companies don’t make it, and the ones that do take a very long time to do so, and the press only covers the most successful ones. That means making money in angel investing is the outlier result. You should actually count on losing all your investments. In addition, even if successful, these assets are completely illiquid; in most cases you can’t sell before a liquidity event, and may end up with the majority of your net worth tied in illiquid investments for a very long time.

You’ll be crushed by later stage investors. That’s how it should be.

Reason #2: You’re not in control
Investing small amounts, and having a tiny ownership percentage with no real ability to follow on, mean you’ll very likely be crushed by later stage investors. They will get preferred shares that are senior to yours, they will decide if and when to clean up the cap table, and you will have no say regarding the company’s operations or financing strategy. That’s how it should be; if you somehow miraculously were given control or a major stake in the company, this will be a big issue for later stage investors and jeopardise the future success of the company. It makes sense; no company wants to be subject to the whims of small, individual investors.

Reason #3: You won’t have access to the best deal flow
Finding the best deals takes a lot of leg work, and you won’t find them just browsing AngelList. There are many ways to create a network that helps with sourcing, like having gone to certain schools or being part of a “mafia”, a group of early employees at a successful startup with the network that it builds. Short of that, you’ll be left looking at companies that everyone else already passed on. Sure, there may be some needle in the haystack but more likely you will probably just be wasting everyone’s time, especially your own.

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Finally, is that exit really a success story?
Startup investing looks like a great idea because the media focuses on the huge successes and “exit” stories without any reference to financial outcomes. In reality, a lot of what we read in the media doesn’t translate into actual returns for investors. Most talent acquisitions results in a loss, especially for the early and smaller investors that have no negotiating power (see point #2 above). Even the average VC barely returns their investors’ money after fees. These are ridiculously bad returns, especially adjusted for risk, and these investors are professionals.

But wait… I still invest in early stage companies. How come?

I love working with early stage companies, and I don’t angel invest to make money. I make a mental “write off” every time I invest my own money.

But I do think I can do some good. As a veteran of the “Klarna Mafia” I was able to join Norrsken Foundation, the Swedish impact entrepreneurship hub and help start their investment practice. At Norrsken I made a few investments because I couldn’t resist some incredible companies and founders, like our investment in Karma in 2016. That helped kickstart my angel investment network.

Angel investing has helped to hone my skills as a VC

Over time my Klarna background, my access to capital, and my desire to help opened up additional opportunities like Pleo and Anyfin, both of which I invested in during 2017. These early investments led to introductions and invitations into additional rounds. I met amazing founders raising money, was able to write checks, and I am willing to decide quickly — the three keys to successful early stage investments. While I don’t angel invest to make money, I really believe that these ones will.

I also believe that angel investing has helped to hone my skills as a VC. In the years since I started my angel investing adventure I’ve been fortunate enough to join the extraordinary team at Blossom, a new European VC who are deeply passionate about helping European entrepreneurs successfully grow their businesses to global leaders, leading series A rounds in startups all across Europe.

At the end of the day, early stage investing is about finding conviction to constantly believe in the outlier results; listening to stories from founders and imagining what will happen if all the stars align and thriving throughout the rollercoaster ride that is the journey.

This is also why, despite all the reasons not to angel invest, I’ve been doing it anyway.

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Marie-Elisabeth Rusling
Marie-Elisabeth Rusling

600 women across Europe – some angels some not (yet) we interviewed at BusinessAngels Europe would disagree : main reasons 1) they want to give back and this is a tremendously enjoyable way to do so 2) these ladies keep fit by being an angel / keeping abreast of latest tech and market developments like in tech, AI, etc. 3) they effectively mitigate risks joining networks and accessing relevant support e.g. on processes / deal terms / limiting dilution… 4) lessons from lead angels help tremendously, notably on diversification, syndication, portfolio management… Check out our WA4E report http://www.businessangelseurope.com/projects

Erik Bullen
Erik Bullen

Hi Louise – I disagree with Reason #3, “You won’t have access to the best deal flow”, although I’m based in Boston, and the ecosystem may be very different from the one in Stockholm. I’m a member of an early stage angel group and an LP of two pre-seed/seed stage VCs, and we have a very good deal flow of strong companies, and we’re often one of the first the take a look. We also have a group of top accelerators – including Techstars and Masschallenge – which helps us to evaluate companies in the early stages.

Tony
Tony

Kan vi ta en mailkontakt Louise?

Patrik Zander
Patrik Zander

Very good article and I think I understand your points about not investing in early stage start-ups. Since I’m on the other side of the fence, I have a question; how do we get funded?

We’re kind of stuck in between our own technology (patented and independently proven) and several large markets.