I want to invest in startups, should I pick deals or invest in a VC fund?

by | May 2023 | Early-Stage Capital

TLDR: angel investing is a skill. It can take years even to start understand what horse you should back, but that’s not even the hard part. The difficult bit is seeing the right investment opportunities in the first place. It’s likely that you’ll find it impossible to get access to the best deal flow, so investing directly should be about more than making money.

My early-stage investments

I’ve done 72 deals myself over the last 11 years and invested in a fund that’s done 14. Here’s where I stand:

72 investments I selected myself (or helped select):

  • 6 exits (4 at ~2x)
  • 11 failures (had another one this week!)
  • 57 remaining, of which:
         👉 13 are worth less than when I invested
         👉 30 are 1-3x
         👉 11 are 3-10x
         👉 3 are >10x

14 investments by Investigate VC:

  • 0 exits
  • 0 failures
  • 14 remaining, of which:
         👉 1 is worth less than when we invested
         👉 2 are ~1x
         👉 4 are ~2x
         👉 4 are 3-4x
         👉 1 is ~5x

Takeaways

  1. While it’s hard to do a direct comparison, as I invested in the VC relatively recently, I believe the likelihood of a negative return (i.e. losing money) is significantly lower with the VC than when investing directly. However…
  2. As an LP in a fund, the chances of making FU money are pretty low. Only a minority of funds return more than 3x in ten years, which is the equivalent of ~11% per annum.
  3. But, unless you get really lucky, VCs will always get better deal flow. I genuinely believe that at least 4 of Investigate‘s portfolio companies have a realistic chance of >50x. Not many of my direct deals will do that. Maybe none.
  4. If one of the VC deals becomes a unicorn, however, my upside will be limited (for starters I have to share it with Mikael, the Managing Partner, and only a fraction of my money will have been invested in that deal, minus the management fee, of course).
  5. If one of my direct deals reaches $1BN, on the other hand, we’re talking FU money.
  6. Making a BIG return as an LP is a bit like making a big return as a direct investor. You need to pick a winner. Not all VC funds are equal (and the ones that deliver consistently high returns are virtually impossible to get into).
  7. Direct investments can take up a lot of time. There’s more paperwork than you might expect, and this doesn’t just happen at the beginning. You’ll be reading and signing lengthy legal agreements throughout the life of the investment. It can be a pain! Personally I don’t do much DD on my direct deals (I’ve been criticised publicly by other investors for this, but it’s my money and it works for me). Knowing the VC is doing this on my behalf, however, gives me comfort.
  8. Just because you invest your money in a VC doesn’t mean you can’t be active as an investor. Just act as a venture partner – review deals and refer anything exciting to your manager. Not only will they be better at saying no than you (because they’ll see the opportunity in the context of all the other companies they’re looking at), but also you can learn from their decision-making priocess.

What you pick depends on your attitude to risk-versus-reward. I feel good about doing a bit of both and feel I’ve struck a nice balance, albeit accidentally.

I’ve had a great time angel investing, made some good mates, learned a lot, and I have an outside chance of making f*** y** money. Meanwhile, I’ve put a larger sum to work in Mikael’s fund, where I already realised a return of ~2x in 3 years, and now believe I have a good chance of a further 3-10x in the next 7-10.

For anyone thinking about getting into early-stage investing, it’s never dumb to spread your risk. I’d recommend looking for more than just startups to back. Think about investing some of your capital in an emerging VC fund, where the upside will include what you learn as well as what you make.

Note: I’m not providing investment advice and in no way qualified to give financial advice. I’m just sharing my own thoughts on what I feel I’ve learned over the last 10 or so years.


Image credits

– Horses photo by Mathew Schwartz.

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