Investing in Public: Non-Obvious Lessons from 100+ Angel Investments
As the CEO of Pipedream, an API integration platform, I work in public and collaborate with our community of over 100,000 developers on Slack, GitHub Discussions, and through our public roadmap.
However, as an angel investor, I feel like I’m working in secret and part of an opaque community that only shares their successes (to much ridicule).
So, why “invest in public” and why now?
I recently made my 100th investment, have made many mistakes, and believe my learnings may be valuable to others.
My investment performance has been strong and most of my investments are audited so I can speak with transparency and credibility.
Sahil Lavingia is correct that more transparency is better for everyone, especially founders and emerging investors.
Lastly, critics will argue that my experience is unrepeatable because (a) as a founder with a significant exit I have unfair access, (b) that the capital requirements of angel investing make it inaccessible, and (c) it is premature to talk about paper returns.
While reputation, past success, and inside information are advantages, they are buildable and I didn’t have them when I began. With regards to capital, the emergence of AngelList and secondary investing platforms have enabled new investors to get started with initial investments as low as a thousand dollars. Lastly, most late-stage private companies are highly liquid so it is no longer accurate to assume that you can’t cash these paper returns in the bank.
Preface
Nassim Taleb said, “don’t tell me what you think, show me your portfolio.” I agree, talk is cheap from an investor without numbers and context.
My first 100+ investments are in three buckets — direct investments, investments in deals via AngelList, and seed funds or special purpose vehicles (SPVs) I managed using AngelList as my back office. Since AngelList has a consistent, mark to market valuation policy, the returns for the latter two buckets can be considered audited by a third party.
In short, investment performance to date looks promising:
Direct Investments: 25 investments, 7.95x multiple, 71.2% IRR
Highlights: Applovin, Chime, Datavant, Iterable, LiveRamp, Madison Reed, Manticore Games, Mynd, Retool, Rippling, and SafeGraph
Investments via AngelList: 49 investments, 1.95x multiple, 45.9% IRR
Highlights: Checkr, Commsor, Jumpcloud, Indio, IronClad, MasterClass, Mercury, OneSignal, Remote, Roofstock, Slice, and Trusted Health
Seed Funds / SPVs: 33 investments, 3.6x multiple, 52.2% IRR
Highlights: Brightback, Dynamic Signal, InCountry, Marqeta, Stackblitz, Rill Data, Tonic, Truework, and Wunderkind
While there has been much written about angel investing (here, here & here), I hope my non-obvious lessons add to the collective knowledge base.
TLDR — 7 Non-obvious Lessons Learned
Find a Load of Bull
Have No Money
Defer Trust
Over Promise, Under Deliver
Invest in Hate
Don’t Quit Your Job
Say Thank You
Lesson #1: Find a Load of Bull
If you read nothing else, read this:
Don’t confuse brains with a bull market.
Almost anyone who has invested in 100 software companies in silicon valley over the past 10 years has had some success.
The analogy I use is from Fantasy Football, where it is stated that if you hand any running back the ball enough times at the one-yard line, eventually they will fall in the end zone.
Silicon Valley investors have been unknowingly investing from the one-yard line for the last decade. The default critical perspective should be that no skill other than physical presence has been required in generating returns.
That said, I believe it is worthwhile to try to learn from our experiences and tease out the signal from the noise. While it will undoubtedly be an imperfect effort, I have tried to focus on lessons that are non-obvious and apply in all times, geographies, and industries.
The first lesson is the most foundational — find a bull market and embed yourself in it. I define a bull market as a rapidly growing industry where there are compelling economic returns on ambition and work ethic.
The power of a bull market is that it lifts all boats which allows you to succeed even while making mistakes. The power of embedding yourself is that will build relationships and know who to listen to or learn from. In retrospect, it won’t always be clear if you were smart or lucky but that isn’t the point. The goals are to learn and generate returns, not to have perfect clarity.
Moving to Silicon Valley, working at venture-funded startups, starting my own startup, hosting founder events, helping other founders, and living in San Francisco was not a random string of events. It was a dedicated effort to find and embed myself in a bull market.
Of course, I had no way of knowing that I had landed in one of the best bull markets in world history.
Silicon Valley has been the ultimate bull market because it is a geographic region, a network of individuals, a large portfolio of investable private companies, and has created trillions of dollars of value in the last ten years. Even two of these four dynamics are quite good and would represent other potential bull markets such as crypto, fintech, Austin startups, or fully remote companies.
The lesson here is to find a bull market, deeply embed yourself in it, and then be comfortable with everyone else calling bullshit on your success.
Lesson #2: Have No Money
As the CEO of BrightRoll, I lacked the two resources generally associated with being a good investor — time and money. As a result, I could only get involved in a project if I had a very strong conviction.
It turns out these constraints are actually an advantage and the reason why your first angel investments may be your best.
My first two “investments” were actually investments in time. In 2011, I became an advisor to LiveRamp (now a $5B+ public company) founded by Auren Hoffman and AppLovin (now a $1B+ revenue private company) founded by Adam Foroughi. In both cases, I was offered the opportunity to be involved because I was a sitting CEO and a domain expert in online advertising.
My investment thesis was simple in both cases — the companies were run by individuals I deeply respected and they were solving market problems I fully understood. Literally and figuratively, these were the two least risky investments I have ever made.
A note of caution — advisors are almost always overpaid. I don’t recommend startups using advisors except in rare cases as most advisors have loosely relevant experience and are better at convincing startups to give them equity than adding value. Be extra skeptical of anyone who is “advising a bunch of startups.”
My first real investment was in Chime, a debit card coupon app that is now a $14.5B fintech business. Ryan King, the founding CTO, was the VP, Engineering at Plaxo where I had worked previously.
My investment thesis in Chime was simple, Ryan was the best engineering leader I had ever worked with and I had tried to hire him multiple times. I knew absolutely nothing about debit cards, coupons, or mobile app development, but it didn’t matter. If you know a superstar and can’t hire them, invest in them.
These first three investments — AppLovin, Chime & LiveRamp — are worth far more than my original invested capital across all 100+ investments. This is not unique and is a reflection of the fact that your first investments may be your best.
The lesson here is that having limited time and capital, coupled with a high bar for participation, is an ideal framework for being an angel investor.
Lesson #3: Defer Trust
As an angel investor, you don’t have the resources or infrastructure to manage institutional processes, yet you still have to find and invest in the top .1% of companies to be successful. As a result, you must defer trust.
There are two effective ways to defer trust — trust others or trust experience.
If I have a superpower, it is finding and identifying great people. I believe this has been my primary unfair advantage in my life, career, and investments. I also believe many successful operators are great at identifying talent and this is one of the reasons successful operators are great investors.
While I’m sure I miss many great talents, I rarely miss the underdogs, grinders, learn-it-alls, get shit doners, and people with multiple chips on their shoulders to succeed. I have spent the majority of the last twenty years of my life talking to and learning from founders, and there is a pool of outliers within the founder ranks. If you simply defer trust to these unique individuals, you can sleep well at night knowing you have a maniacal grinder minding the store and mining their industry for opportunities.
In 2017, I sat next to my friend Amy Errett, the founder of Madison Reed, on a long flight home from a conference. Amy is a founder’s founder — she is authentic, hard-working, an execution machine, and is also uniquely capable of using the word “love” in a corporate environment. As she updated me on the business, I remember thinking I wouldn’t want to compete with Amy for one minute, whether in women’s hair care products or on the basketball court. She is a winner, full stop. I invested and deferred my trust entirely to Amy — I did no diligence, talked to no customers, and accessed no financials.
In some cases, the product is simply so good, the need is so clear or the entrepreneur is so compelling, that you don’t need company numbers or a relationship with the company. You simply need to defer trust to your own experience as a user, customer, or operator. However, deferring trust to experience is hardest early in your career because you lack experience.
Gaining relevant work experience is relatively straightforward — if you want to invest in startups or start your own company, it’s good to have experience working at a startup. You will learn how startups function, what products and tools they use, how a founder operates, pivots and compensates (or doesn’t) for their weaknesses, and can more easily embed yourself in the startup community. I worked at three startups over three years before starting my own company and felt like I had learned a decade of lessons. And, of course, nothing compares to the learnings you get from running your own company.
In 2019, I was offered the opportunity to invest in Rippling via an SPV and three personal experiences informed my investment thesis. First, a few years prior, Parker Conrad had come to the BrightRoll office to sell me Zenefits. From that one meeting and his follow-ups, it was clear to me that Parker is a learn-it-all who will fight to the death before he loses the market. Second, I have used many of the Payroll, Benefits, HR & IT platforms, and know they are underwhelming yet extremely sticky once they are deployed. Lastly, any entrepreneur who has had success and wants to start the same company over again has my money (look no further than Zoom, AppNexus, Safegraph, etc.). I deferred trust to my personal experience, invested, and did no further diligence on Rippling.
The lesson is that you do not have the time or resources to do institutional quality diligence so you must defer trust. By deferring trust to others or your experience, you can move quickly and spend your time sourcing the best opportunities.
Lesson #4: Over Promise, Under Deliver
When you can’t defer trust, the next best option is to simply bet on growth. In other words, be a momentum investor.
The dirty secret about the best-performing venture firms in Silicon Valley is that they are momentum investors. If you see the majority of all private companies’ internal metrics and simply invested in the ones with the best numbers, you would do extremely well.
If Warren Buffett were a VC he would say, “I try to invest in businesses that are so wonderful, even a domain expert can’t add value.” It’s non-intuitive, but your best investments won’t need your help.
The next logical question is how do you hear about these potential momentum investments? It turns out this data is everywhere.
While it is ideal to receive financial data from the company, it is more likely you will hear growth numbers elsewhere by someone bragging or gossiping. The more embedded you are, the more data you will come across.
You may overhear revenue metrics from an employee, sales volume from someone at an e-commerce platform, user growth from someone at a customer data platform, bank account connections from someone at a fintech middleware company, or growth metrics from an early investor.
The two items that flow most freely among VCs are fleece vests and private company data. Every junior VC is a member of some Telegram group sharing confidential board presentations and every senior VC is bragging about their highest performing positions.
When high profile investors such as Marc Andreesen, Bill Gurley, or Paul Graham say a company is growing fast, it means it is growing fast. Open your ears and listen to what your network of friends, colleagues, and investors are saying, and find out where they are over-promising and under-performing themselves.
In 2018, I had an opportunity to invest in Checkr and I invested immediately upon seeing the financials of the business. Over the years, I had heard that Checkr was doing quite well and I had even met Daniel Yannise once, but at the time I had no real connection to the company. Checkr was simply the fastest growing and most impressive financially performing startup I had seen in my career. I deferred my trust to the numbers and did no further diligence.
In both cases, Checkr and Marqeta, I have tried to find ways to add value but I remain embarrassed by how little I have done. While I have fortunately built personal relationships with both CEOs and now know my trust was well placed, it would be untruthful to say the companies would be anywhere different without my involvement.
What is non-intuitive about being a momentum investor is that you always over promise and under deliver. There is little you can do as an outsider to materially impact or improve a business that has a powerful product-market fit.
The lesson here is to invest in outlier momentum when you see it and accept the fact that you will over promise and under deliver in those situations.
Both deferring trust and investing on momentum have extra inherent risk because you have done little to no diligence. In one case, I invested in a company purely based on the numbers and it turned out to be fraudulent. While I luckilly got 85% of my money back, my belief remains that the risk doesn’t outweigh the efficiency of this strategy. You simply must price the risk in and diversify.
Lesson #5: Invest in Hate
While I consider myself a loving person, as a customer I can easily develop a hatred for bad products or products with strong pricing power.
I hate every traditional banking user interface, every spam email from an e-commerce company, and every piece of physical mail sent to my house. These are bad products on the path to obsolescence.
I also hate Comcast cable plans, Google Ads customer service, or negotiating an annual contract with an enterprise salesperson at Carta, Salesforce, or Amazon Web Services. I hate (and admire) these products because they are essentially monopolies and they have complete leverage over me. In the cable and customer service cases, leverage is expressed through bad customer service. However, in the enterprise software cases, leverage is expressed through pricing power, where a salesperson says “sorry, this is the absolute minimum price allowed by management.”
As a CEO, I expressed my hatred by contracting with new companies addressing problems in more innovative or cost-efficient ways. In fact, this is one of the main reasons I began investing because we were early customers of Okta, Looker, New Relic, PagerDuty, Box, Greenhouse, and AWS. While not every vendor we worked with would have been a great investment, the portfolio would have been incredible.
As an investor, there are two ways to invest in hate:
invest in alternatives to a product you hate because you know it can win
invest in a product you hate because it’s a burgeoning monopoly
Silicon Valley Bank’s brand is an offense to Silicon Valley. The firms’ only technical innovation appears to be the ability to hide a traditional banking business, a bad user interface, and an army of salespeople under the guise of a startup. The same can be said for basically every traditional bank with a commercial banking business. So, when Zach Coelius told me Immad Akhund was starting Mercury, an alternative business bank for startups, I committed to invest on the spot. There are few products more in need in the valley than an alternative to the traditional bank offerings and, while I hadn’t met Immad yet, he was a widely respected founder and investor at the time.
As I look at my investment portfolio, I can easily see my hatred as a customer expressed in a variety of ways:
Hate: traditional finance. Love: AltoIRA, Chime, Mercury & Marqeta
Hate: bad internal tools. Love: Commsor, Iterable, Retool & Rippling
Hate: paper-based processes. Love: Checkr, IronClad & Truework
Hate: legacy data platforms. Love: Datavant, InCountry & SafeGraph
Lastly, investing in emerging software monopolies is one of silicon valley’s most successful investment strategies. What’s amazing is how often I have often failed both in negotiating the price as a customer and in getting access as an investor, in the same company.
My anti-portfolio of missed opportunities includes AngelList, Carta, DataDog, Docusign, GitLab, Gusto, Looker, Segment, Slack, and Snowflake, and my learnings in this area form the foundation for my entire investment philosophy moving forward.
The lesson here is to identify what you hate as a customer — either because it is a bad product or has pricing power — and use that insight to form your investment thesis.
Lesson #6: Don’t Quit Your Job
Many operators want to become venture investors and many venture investors position themselves as former operators. In fact, they often use the term “operator investor.”
However, the label is pointless. The facts are most VCs were in operating roles at some point in their career and they aren’t in one now. This positioning is most evident in the repetitive programmatic inbound emails that VCs send to founders:
Hi Tod — My name is [first_name] and I am working with [venture_firm], investors in [best_investment], [second_best] & [third_best]. We have a team of operator investors with great expertise in [your_category].
We’ve recently learned about [your_company] and got really excited. It perfectly fits with our operating experience. I would love to learn more about your product and business so let me know if we can have a short call.
This email can be loosely translated to “your company is 1 of 1500 we are tracking in a Google Sheet so please send over your metrics asap so we can develop a perspective on your category, move you through our investing funnel and potentially identify a company with momentum before a competitive financing process ensues.”
I would never send this email and I would recommend never responding to this email. This is why operating investors > operator investors.
An operator can send the following email and deliver on the promise:
Hi Tod — My name is [first_name], I am the VP, Product at [my_company]. I spend my time improving [our_product] and driving revenue, but I occasionally like to meet other product leaders with similar goals and challenges.
In particular, I would love to discuss [our_best_growth_strategy] and compare notes on [our_shared_challenge]. Also, I’ve spent four years on [your_biggest_challenge] and can share my lessons learned.
I have always preferred to raise money from CEOs, executives, and other operators because their experience is current, their network is immediately actionable and they are sitting in the seat that is comparable to the one I am sitting in at that moment in time.
Furthermore, being an angel investor isn’t scalable. While it is relatively easy to hustle and get a $25k allocation in an emerging startup, hustling is not going to be sufficient to get you a $5M allocation in a $50M company. If you want to build something institutional — meaning outside capital, larger check sizes, and professional diligence — you generally need to commit full-time to the effort or partner with professionals who are full time. And, if you go full-time, your operator credibility declines rapidly.
I believe there is a better way and have chosen the path less traveled which represents the best of both worlds. I have decided to continue investing as an operator but partnered with fellow operators (Auren Hoffman), and professional investors (Jeffrey Lu) who have experience managing institutional capital.
While it is early, we are continuing to invest in the same types of companies I invested in as an angel investor and applying these lessons learned at a scale that I could have never achieved as a single angel investor. Our current portfolio includes Commsor, Datavant, Gorgias, Juniper Square, Threads, TrueWork, and a group of seed investments.
The lesson here is don’t quit your day job. The best and most sought after investors are operating investors and, if you go full time, you lose your greatest value.
Lesson #7: Say Thank You
Unfortunately, investors have short memories.
I have personally returned over $300M to venture firms, and my introductions to and references on other companies have generated returns in far excess of those numbers. However, outside of a few individuals, it is extremely rare to receive even a simple thank you 5–10 years later when an exit occurs.
Additionally, most investors forget where they sit on the capitalization table. Most likely, you weren’t a board member, didn’t lead a financing round, never had to make a tough call of firing an executive or co-founder, and didn’t bridge the company through a tough time. As such, be polite and respectful to be along for the ride and don’t pester the company by asking for information, introductions, or references you don’t deserve.
Many investors have written more blog posts about the early days of their successful investments than they have delivered thank yous to those who helped them discover, diligence, get access to, and ultimately invest in those same startups.
So, here are my thank yous.
First, thank you to the CEOs / founders for giving me the opportunity to try to help. It is my belief that investors add little value to most companies and add almost no value to the best companies. If I have offered anything, it was empathy, a trusted space to vent, and a willingness to be a thought partner.
I truly believe that entrepreneurs are the lifeblood of the global economy and our collective efforts could not be more purposeful and worthwhile. You are either on the field or off the field, and I stand with the founders, builders, and grinders who are on the field every day.
Second, thank you to those individuals who connected me with other CEOs / founders. At the top of the list are Saar Gur and Auren Hoffman. Saar is a good friend and partner at CRV, who has sent me more introductions that led to investment opportunities than anyone else including AppLovin, Iterable, and others. Similarly, Auren allowed me to invest in both of his companies, introduced me to countless others, and is now one of my investing partners. Other people for whom I am forever in their debt include Jon Callaghan, Rob Theis, Michael Kim, Aydin Senkut, Zach Coelius, and Ron Will.
Lastly, thank you to Gil Penchina and Naval Ravikant.
Gil was patient zero as the first angel syndicate lead using AngelList as his back office. He demonstrated the playbook for using AngelList as a platform for rapid ideation, iteration, and learning, and also demonstrated how investors could learn quickly by making a diversified portfolio of small bets.
Naval built AngelList and has done more to democratize angel investing than any person, product, or company in the world. He also opened my eyes to the role an operator investor could play in the valley and supplied the tools and best practices to execute on that idea. While I was unsuccessful in getting Naval to invest in my company, I have benefitted and learned so much from him that I remain hopeful I will find ways to return the favor.
The last lesson is that saying thank you is humbling, helps build relationships, and highlights that angel investors aren’t as smart as they think they are, particularly given the amount of luck in the business.
In the end, it is better to be lucky than smart, but it’s even better to be humble and in a bull market.
Thanks to Ben Black, DJ Deb, Auren Hoffman, Jason Gardner, Saar Gur, Jeff Lu, Ron Will, and Daniel Yanisse for reading drafts of this post.
Superb. I’ve unknowingly put a couple of these to work in the past — gratitude (and empathy) probably being the most important. You’ve written an excellent primer.
Very thoughtful Tod, thanks. I recently did a similar exercise (ok maybe a lot of people are doing it end of year) and found returns by deal source showed a similar pattern as you - people you know are best, and there is good stuff on angel list but overall lower returns there. I think something to do with being hard to defer trust on an angellist deal.