My learnings from 87 early-stage investments.

by | Oct 2022 | Early-Stage Capital

I am one of the three cofounders of DQventures. Since 2012 I’ve made 57 direct angel investments, backed a further 25 companies as a limited/general partner (via Medra Capital and Investigate VC), earned “sweat equity” in 5 companies as an advisor, and launched 4 ventures of my own.

From a decade’s worth of startup experience, here are my key takeaways (not investment advice!):

  1. First off, you don’t need to be rich to be an angel investor. Through my working life I’ve had only a handful of times where I’ve felt wealthy. The rest of the time, I’ve felt poor. Thanks to crowdfunding platforms, however, I’ve been able to continue investing throughout the slumps. My largest angel cheque so far was US$75,000, but my smallest was just GB£250.
  2. Don’t think of crowdfunding sites as second-best. Some of the most exciting deals I’ve been exposed to have come via Crowdcube (for example Revolut, Monzo, Chip, Small Robot Company, Clim8, and many more).
  3. Maybe this is peculiar to me, but I suspect others will agree… I feel equally excited about companies in which I’ve made a modest investment, as those into which I’ve invested a lot. For some inexplicable reason, post-investment the amount I’ve committed becomes irrelevant. I know it’s material, but somehow it’s the journey that matters most.
  4. Having said that, I now believe it’s sensible to write the same size ticket for every investment you make. It’s virtually impossible to predict which ventures will fail, and which will outperform. When you place certain outsized bets, it really hurts when they fail.
  5. Also, you really must diversify. Statistics show that the more you spread your money, the better your chances of a large return, and the lower your chances of a complete failure. I’d say you need a minimum of 20 deals to feel “safe”, but the more the merrier.
  6. Even the best looking deals can come unstuck. I’ve been impacted by founder burnout, tragic accidents, and even had one founder hospitalised in a violent street assault. Outcomes are impossible to predict, so play the numbers game.
  7. If you want to retire in 5 years, forget angel investing. The popular view seems to be that the startup cycle from start to finish takes 3-to-5 years. It doesn’t. I’ve been in many of my deals for a decade. In most of those cases, there’s no obvious sign of an exit. You need to view each investment as a minimum-10-year commitment. You may get lucky with an early exit, but in my experience it’s unlikely.
  8. All-in, I’ve invested in 88 deals over a 10-year period, and I have yet to make a return that made a material difference on my standard of living / wealth. However…
  9. The chance of a home run is ever-present. On paper, things look very different. I’m sitting on two deals that could each yield a multi-million-dollar return (wish me luck). What other investments offer that kind of up-side and excitement?
  10. Also, although you will definitely lose money, I don’t personally believe venture deals are as risky as their reputation would suggest. To date, I’ve achieved a 12% IRR (i.e. cumulative interest) from a standing start, without a single star performer exit, and with minimal due diligence. Many of the companies I’ve backed are now profitable, and some are quite large. Several companies within my portfolio could dramatically improve that IRR, delivering 300-400% more than all my other investments combined. I don’t believe I’ve been particularly lucky, but I have always been diversified.
  11. A couple of things to remember, especially if you’re going to “spray and pray” using crowdfunding…
  12. Always avoid services companies, or any business model that’s hard to scale. I focus exclusively on low marginal cost businesses (nearly all software and media).
  13. The power law is just as real for angels as it is for VCs. One unicorn in your portfolio can make every other investment seem meaningless, even if you only invest a little.
  14. For that reason, it pays to be in on sectors that regularly yield huge returns, and that attract VCs. For a company to achieve a huge exit, it will almost certainly require venture backing, and yet very few companies are well suited to VC investment.
  15. I particularly like fintech, media, and deep tech. My biggest mistake to date was passing on Revolut when they crowdfunded at a ~GB£40m valuation (I liked the company, but thought the price was too high). These days, if the problem being tackled is big enough and I like the team, I’ll place a small bet, even if the valuation seems punchy.
  16. For larger bets, I’ve avoided sexier industries and focused on startups with experienced founders who bring unusually high levels of “unfair advantage”. This strategy is perhaps less ambitious, but it is the main reason I believe I’ve suffered very few write-offs. These founders have typically been better prepared, risk averse, and quicker to reach breakeven.
  17. If you can do it, by far the best way to make money is to get founder equity. Angels typically invest at a $2-5m valuation, but that means the company needs to exit at >$40m for the exit to be particularly exciting. That’s why companies that sell for <$15m are generally not great outcomes for investors. But a $15m exit can change a founder’s life beyond recognition.
  18. Of course, being the founder is the riskiest possible way to get exposure to startups. Not only are all of your eggs are in one basket, but you risk your reputation, suffer opportunity cost, exert incredible pressure on closest relationships, and put serious strains on your mental health.
  19. For that reason, don’t ever found a company because you want to make money. Startups are really hard. You need to do it because it’s what you intend to do with your life, succeed or fail. The main reason startups fail is because founders give up. Start something you will never give up on.
  20. What you really want is to own a small amount of founder equity in multiple companies, none of which you depend on for your income and livelihood. That’s what we’re doing here at DQventures; 100 companies worth $10m+, in which we own >10%. If you want to be part of that journey, either as an investor or a member of the team, reach out to us on LinkedIn.

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– Brain image by Milad Fakurian.

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