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Things I wish someone had told me before I started angel investing

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Re: Things I wish someone had told me before I started angel investing

#81

There is a small cadre of people who actually have what it takes to successfully build an NBT, and experienced investors are pretty good at recognizing them. I really do question this. The "problem of induction"[1] comes into play when you start talking about pattern matching and learning from "experience". That is, there's no guarantee that the future will look like the past. Before Zuckerberg was Zuckerberg, I wond…

Well Sean Parker and Peter Thiel seem to have picked up on it in the very early days. Not to mention the fact that the two biggest/best VC funds co-investing for the first time, letting them take money off the table.

It's fair to say those weren't average reactions.

Re: Things I wish someone had told me before I started angel investing

#82
Good news: I can agree with some of the OP.

Much better news: I do believe that it's fairly obvious that there are good solutions to the most important problem mentioned in the OP.

First a remark on scope: I'm talking about information technology (IT) startups based heavily on Moore's law, the Internet, other related hardware, available infrastructure software, etc., and I'm not talking about bio-medical technology which I suspect is quite different.

Second, a remark on methodology: When the OP says "almost certainly" and similar statements about probability, sure, (A) in practice he might be quite correct but (B), still the statement is nearly always just irrelevant.

Why irrelevant? Because what matters is not the probability, say, estimated across all or nearly all the population, or all of business, or all of startups, or even all of IT startups. Instead, what is important, really crucial, really close to sufficient for accurate investment decision making, is the conditional probability given what else we know. When the probability is quite low, still the conditional probability -- of success or failure -- given suitable additional events, can be quite high, thus, giving accurate decision making. So, net, what's key is not the probability but what else is known so that the conditional probability of the event we are trying to evaluate, project success or failure, given what else we know is quite high.

So, back to the OP. We can start with the statement:

> The absolute minimum to play the game even once is about $5-10k, and if that's all you have then you will almost certainly lose it.

Here for the "almost certainly" to be true needs to depend on what else is known. Sure, if not much more is known, then "almost certainly lose it" is correct. But with enough more known, the first investment can still likely be a big success.

The big, huge point, first investment or 101, is what else is known.

> There is a small cadre of people who actually have what it takes to successfully build an NBT, and experienced investors are pretty good at recognizing them.

I agree with the first but not with the second. From all I can see, there is hardly a single IT investor in the US who knows more than even dip squat about how to evaluate an IT investment. E.g., commonly the investors were history or economics majors and got MBA degrees. Since I've been a prof in an MBA program, I have to conclude that a history or economics major with an MBA has no start at all evaluating IT projects.

Here is huge point:

We can outline a simple recipe in just three steps for success as an IT startup:

(1) Find a problem where the first good or a much better solution will be enough nearly to guarantee a great business, e.g., the next big thing.

(2) For the first good or much better solution, exploit IT. Also exploit original research in high quality, at least partly original, pure/applied mathematics. Why math? Because the IT solution will be manipulating data; all data manipulations are necessarily mathematically something; for more powerful manipulations for more valuable results, by far the best approach is to proceed mathematically, right, typically with original work based on some advanced pure/applied math prerequisites.

(3) Write the corresponding software, get publicity, go live, get users/customers, get revenue, and grow the revenue to a significant business.

So, right: Step (2) is a bottleneck: The fraction of IT entrepreneurs who can do the math research is tiny. The fraction of startup investors who could do an evaluation of that research or even competently direct such an evaluation is so small as to be essentially zero.

So, net, the investors in IT are condemned to miss the power of step (2) and, thus, flounder around in nearly hopeless mud wrestling in a swamp of disasters. And, net, that's much of why angel investors lose money.

So, the main problem in the OP was losing money on IT projects. The main solution, as both an investor and an entrepreneur, is to proceed as in steps (1)-(3).

For IT venture capitalists (VCs), they can't use step (2) either, e.g., can't do such work, can't evaluate such work, and can't even competently direct evaluations of such work, but they have a partial solution: Likely enforced by their LPs, in evaluating projects they concentrate on cases of traction and want it to be significantly high and growing rapidly.

So, with this traction criterion, and some additional judgment and luck, some of the VCs get good return on investment (RoI), but they are condemned to miss out on step (2).

So, what is the power of step (2)? As we will see right away, clearly it's fantastic: Clearly with step (2) we can do world changing projects relatively quickly with relatively low risk.

The easiest examples to see of the power of step (2) are from the US DoD for US national security. Some of the best examples are the Manhattan Project, the SR-71, GPS, the M1A1 tank, and laser guided rockets and bombs, all relatively low risk projects with world changing results. Each of these projects, and many more, was heavily dependent on step (2) and met a military version of steps (1) and (3).

More generally, lots of people and parts of our society are quite good at evaluating work such as in step (2) and proposals for such work, just on paper. We can commonly find such people as professors in our best research universities and editors of leading journals of original research in the more mathematical fields.

I started some risky projects, e.g., an applied math Ph.D. from one of the world's best research universities. From some good history, only about one in 15 entering students successfully completes such a program. The completion rate of applied math Ph.D. programs makes the Navy Seals and the Army Rangers look like fuzzy, bunny play time. With much of my Ph.D. program at risk, I took on a research project. Two weeks later I had a good solution, with some surprising results, quite publishable. Later I did publish in a good journal. I could have used that for my Ph.D. research, but I had another project I'd pursued independently in my first summer -- did the original research then, in six weeks. The rest of that work was routine and my dissertation. While working part time, the Navy wanted an evaluation of the survivability of the US SSBN fleet under a special scenario of global nuclear war limited to sea, all in two weeks. I did the original applied math and computing, passed a severe technical review, and was done in the two weeks. Later I took on a project to improve on some of our work in AI for detection of problems never seen before in server farms and networks. In two days I had the main ideas, and a few weeks later I had prototype software, nice results on both real and simulated data, and a paper that was publishable -- and was published. My work made the AI work look silly; it was. Once in a software house, we were in a competitive bidding situation. I looked at what the engineers wanted and saw some flaws. Mostly on my own, I took out a week, got good on the J. Tukey work in power spectral estimation, wrote some software, and showed the engineers how to measure power spectra and how to generate stochastic process sample paths with that power spectrum. As a result, my company won sole source on the contract. So, before I did these projects, they all were risky, but I completed all of them without difficulty.

Lesson: Under some circumstances, it's possible to complete such risky projects, given the circumstances, with low risk.

But IT VCs can't evaluate the risk before the projects are attacked or even evaluate the results after the projects are successfully done. So IT VCs fall back on traction.

I confess: It appears that the IT VCs are not missing out on a lot of really successful projects. Well, there aren't many IT startups following steps (1)-(3).

So, for IT success, just borrow from what the US military has done with steps (1)-(3).

The problem and the opportunity is that nearly no IT entrepreneurs and nearly no IT investors are able to work effectively with steps (1)-(3), especially with step (2).

The IT VCs have another problem: The know that for the next big thing -- Microsoft, Apple, Cisco, Google, Facebook -- they are looking for something exceptional. And they know that those for examples have very little significant in common. Still the IT VCs look for patterns for hot topics at the present or recent past. That's no way to find the desired exceptional projects. E.g., when the US DoD wanted the Manhattan Project, they didn't go to the best bomb designers of the previous 20 years; doing so would not have resulted in the two atomic bombs that ended WWII. Instead, the US DoD listened to Einstein, Szilard, Wigner, Fermi, Teller, etc., none of whom had any experience in bomb design.

Re: Things I wish someone had told me before I started angel investing

#83
post #40
post #30

Earlier quoted context omitted.

Something specific, or just unethical behavior in general?

Not "in general", but there is a long list of unethical behaviors that, sadly, can contribute to success. Selling snake oil. Abusing monopolies. Flat-out lying. However, it's not good to go to the other extreme. I've seen companies fail because the CEO bent over too far backwards to be ethical and as a result let people walk all over him. One of the qualities that seems to be required in a successful founder is a wil…

You have to be willing to drive a hard bargain, but that's not unethical, nor does it make you an asshole. I'm not sure being an outright asshole is ever required. Do you think it is?

Re: Things I wish someone had told me before I started angel investing

#84
post #69
post #38

> But the cool kids don't beg. The cool kids — the ones who really know what they're doing and have the best chances of succeeding — decide who they allow to invest in their companies. The company I was an early employee of (that ended up being a "unicorn") was not a cool kid, and we certainly were begging people to invest both at the angel stage and (especially) the series A stage. And those people got a really real…

OP didn't claim that the cool kids always succeed, or that the uncool kids never succeed. Just that they have higher odds.

And numbers backing the claim would help. A lot. I'm inclined to believe it is all a craps shot.

Re: Things I wish someone had told me before I started angel investing

#85
post #44

Interesting read. I'd love to hear from other angel investors with (perhaps) different experiences and opinions.

my experience is that good deals are only available/viable/mutually beneficial when you have direct personal, close connections (please stop sending LinkedIn messages!) to the team. "retail" investing doesn't succeed in this arena.

my opinion is that you should only invest as a lone/lead angel in what you know from your long history in a super niche space where you know all the important cognoscenti from a career full of personal interactions...anything else is a guaranteed loss. fine if you use it as the OP says to learn about a market. though would be better IMO to just volunteer to work at a startup in a new area and learn by doing...which I have done and found highly educational and ultimately rewarding.

Re: Things I wish someone had told me before I started angel investing

#86
post #40

Earlier quoted context omitted.

Not "in general", but there is a long list of unethical behaviors that, sadly, can contribute to success. Selling snake oil. Abusing monopolies. Flat-out lying. However, it's not good to go to the other extreme. I've seen companies fail because the CEO bent over too far backwards to be ethical and as a result let people walk all over him. One of the qualities that seems to be required in a successful founder is a wil…

You have to be willing to drive a hard bargain, but that's not unethical, nor does it make you an asshole. I'm not sure being an outright asshole is ever required. Do you think it is?

Yes. Mainly when dealing with other assholes.

Re: Things I wish someone had told me before I started angel investing

#87
post #73
post #57

Earlier quoted context omitted.

I was in denial about this for a long time, but the fact of the matter is that your overall outcome is almost entirely determined by your outliers. If you take all of the investments I've ever made, including going to work as an early hire at Google, the I've won. If I leave out Google, then I've lost. If I leave out my single biggest loss, then I've won again. If I leave out my next biggest win, then I've broken eve…

Very interesting, thanks for responding.

You bet.

Re: Things I wish someone had told me before I started angel investing

#90
post #45

Earlier quoted context omitted.

It's not _required_ to be unethical, it's just really tempting when you see others get rewarded for their unethical behavior. "When circumstances demand it" is of course the excuse of all unethical people throughout history. Total weak sauce.

Try being the only one without a pile of patents on important tech in a patent war. Offensive use of patents + piles of money from market share and their own lock-in are among the reasons newer, big players are holding off older ones in the patent suits designed to eliminate competition with older ones. Originally, I thought I could just avoid what was patented until I learned how vague and ridiculous they are. Plus,…

You have an unusual set of ethics there. What you're describing for patents is not violating patent law, and I doubt you'd find many people in the tech industry who would equate potentially infringing someone's patent to adopting source code you don't own into your product in a copyright-infringing way.
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