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Some Tips on Angel Investing

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Saw this stream across Twitter and it seems pretty good.

Charlie Munger says investing requires a latticework of mental models. Here are 11 lessons for your angel investing lattice:

  1. If you can’t decide, the answer is no.
  2. Proprietary deal flow means ‘they want you’.
  3. Investing takes years to learn but improves for a lifetime.
  4. Valuation matters: you will have to pass on future greats.
  5. Back $0B companies.
  6. Judgment is important but overrated.
  7. Invest only in technology.
  8. Some of the best investors have no opinions.
  9. Incentives make for bad investing advice.
  10. Play fantasy football.
  11. Power beats contracts.

They have their own descriptions of these tips at the web link I posted but I thought I might elaborate on my own.

  1.  Truly, if you can’t decide the answer must be a No.  Why?  You only have so much risk capital.  You must allocate that capital to companies and entrepreneurs where you feel a lot of conviction.  If you are wishy washy, you won’t feel conviction.
  2. Proprietary deal flow means they want you, but it also shows that you are working to earn it.  No one wants you if you don’t earn it.
  3. Investing does take years to learn.  I am a much better investor today than I was ten years ago.  I will be a much better investor ten years from now than I am today.  This is not true for trading since the time horizon for trading is short.  Investing is not trading.
  4. Valuation does matter a lot.  At sub $8MM my expected IRR is significantly higher than at higher valuations.  Makes sense.  But, because I am constrained on my capital allocation, investing in a deal later on in the cycle might not make as much sense as doing another seed deal even though the later cycle deal looks pretty sweet.
  5. Focus on hitting home runs.  You might see a good deal that can exit at a low valuation, but the risk/reward of the capital allocation is the same.
  6. Judgement is important but it changes over time. As markets change, your judgement will change.  Hence, Fama’s efficient market hypothesis and the change in stock prices moment to moment given new information that enters the market.
  7. Tech companies scale and scale fast.  They can get big.  Other companies can get big, like restaurant franchises, but take time and the mountain is harder to climb with more variability of outcome.
  8.  For every buyer there is a seller. That means someone has a different view, a different opinion.
  9.  Invest because you have conviction.  Don’t invest for tax breaks, lower fees, or more dividends/options.
  10.  This is like paper trading on the old trading floor.  I was never much into paper trading.  It might help some people but it doesn’t help me.  I don’t have the same competitive juices flowing through me when I know real money isn’t on the line
  11. If you are an angel, build a syndicate.  Invest in a pack. It gets lonely when you aren’t and you can be at the mercy of next round investors, service providers, or the entrepreneur.

Pretty sound advice I think.


Source: http://pointsandfigures.com/2019/04/18/some-tips-on-angel-investing/


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