Why You’d Make A Terrible Angel Investor

I started angel investing almost by accident, which sounds strange to say. Who “accidentally” invests tens of thousands of dollars into highly speculative ventures? Well, I did.

November 6th, 2016   |    By: Tucker Max    |    Tags: Funding

I started angel investing almost by accident, which sounds strange to say. Who “accidentally” invests tens of thousands of dollars into highly speculative ventures? Well, I did.

A friend introduced me to Clayton Christopher who was raising money for his new liquor company Deep Eddy. Their first product, a sweet tea vodka, was amazing and he was an experienced entrepreneur, so I went in.

Investing was an exciting, interesting process. Then the company took off, and I got to tell everyone I know that I invested in that new vodka that everyone in Austin was drinking. Winning is the ultimate intoxicant, and from there, I was hooked.

I started investing in companies left and right. I became a huge cheerleader for angel investing. I wrote about how great it was, I recommended everyone do it, and helped a bunch of people start.

I was wrong.

I have completely quit angel investing, and I’m telling you to never start.

Be clear: Angel investing as an activity is great. When the right people do it the right way, great companies are created and everyone wins. I’m NOT reversing my position on the activity itself, only on who should be doing it.

By the end of this piece, my hope is that you will understand four things:

  1. Why I stopped actively angel investing
  2. Why you should never start angel investing
  3. Who should be doing angel investing
  4. What you should do instead (and how to invest if you must angel invest)


My Angel Investing Background

This will give you an idea of my angel experience. I’ve found that 80% of the writing about angel investing is total crap, written by inexperienced amateurs who have never done it. That’s not me.

From 2010 to 2014, I put 1.2 million dollars (of my own money) into ~80 companies.

Thirty-six were direct investments. You can see some of my direct investments on my Angellist page. The rest was invested through two larger funds where I am an LP (ATX Seed Fund and Evolve VC), and one smaller fund I advise.

I’ve done pretty well with my investments. Emphasizing that no return is truly real until the money is in the bank, I can say that as a minimum, a 5x return on my 1.2 million is guaranteed. And because the internal rate of return on the two funds I am in is very good as of right now, a 20x return (or more) is very much in play over the next 6-8 years.

I also gained notoriety from my angel investing. I was written up in New York Magazine as a leader in the trend of celebrity angel investing. I wrote about some of my investments, and a series of posts I wrote about crowdfunding, both of which got a lot of attention.

Because of these posts (and other things) I had hundreds of companies ask me to invest, I spoke at conferences about crowdfunding and angel investing, I was asked to write for magazines and sit for on-camera interviews for a documentaries, and was even offered a role on a TV show about angel investing (that never ended up airing). I’m also a mentor at the best consumer products incubator in the nation, SKU.

This is not bragging. I am a small fish as far as angel investors go. I say this only to establish what very few who write about angel investing on the internet have: I have actual experience and credentials investing real money into real companies.

Why I Stopped Angel Investing

There are two reasons I personally stopped angel investing:

  1. There’s a dearth of good people to invest in
  2. Angel investing is a poor use of my time

1. There’s not enough good people

This is a major problem right now in start-ups that I see very few investors talk about openly, and I’m not sure why.

Lots of people talk about the start-up and tech world being in a bubble. This is just objectively not true. Yes, there is a ton of money chasing companies, and yes it is pushing prices up, but we aren’t close to a bubble. There are many ways to see this, but the big one is obvious: it’s never a bubble when everyone talks about it being a bubble.

There are also people who say the company ideas out there suck, and that start-ups aren’t solving big problems. This is nonsense. In fact, from where I sit, most of the cutting edge work being done in America to make the world better is coming FROM start-ups. None of it is coming from the Gawker writers talking about tech’s issues, that’s for sure.

Combine these two things–lots of money chasing start-ups, and start-ups working on big ideas–and that should be really good news, right? After all, that is the ENTIRE point of investment: allocating resources to the highest possible use.

So if there is enough money and lots of good ideas, where is the problem?

It’s the people.

What’s so great about entrepreneurship is that you don’t have to be from the “right” crowd to start a company–you can just do it, without anyone’s permission. But when you have a lot of money chasing all these great ideas, and you combine it with the fact that entrepreneurship has gotten sexy in the last few years and become the “in” thing for a certain crowd, what you end up with is a huge number of people starting companies who have no business at all doing that.

I don’t mean this as a social judgment, or to cast aspersions. One hundred years ago we might call these people charlatans or snake oil salesmen. But that’s not what’s going on here. Most of them are very sincere, and their ideas are great. What I mean when I say “they have no business starting a company” is that they cannot actually execute effectively in a start-up environment.

Ultimately that’s the only measure that matters: can you do the job?

Over the past 18 months, I’ve probably looked at around 400 companies in many different areas. I’d say that 75% were solid ideas, and I’d say that over 50% were in potentially huge markets. But I’d estimate that only about 20% of the people starting those companies have the ability to actually do the job.

These are not random companies off the street. I’m talking about teams I’m seeing at Demo Days from major incubators, or outfits that have already raised big seed rounds, or start-ups that have gotten press. These are “validated” start-ups (at least validation as it is currently defined).

And by “ability” I don’t mean “they have the right resume.” I mean far more basic things, like “they have no idea how to sell this product,” or “they have no idea what business they are even in.” Brad Feld captured it perfectly in this piece. I was having conversations like that one every day, the same as him, with inexperienced kids totally lost in all aspects of running a business.

I think this became a problem for two main reasons:

1. Bad education: There is not a well understood theory of going from a start-up to full company. There is a lot out there on how to come up with ideas and test them (e.g. The Lean Start-up), and the entire business school MBA edifice is great at teaching how to manage a company once it reaches scale with a market-validated product.

The problem is there’s very little effective information about going from tested idea to scalable company–what to do and how to do it. In essence, our informal educational system teach 0 to 1 pretty well, and our formal education teaches 10 to 1000 very well, but there is almost nothing about 1 to 10 (which is VASTLY different than the other two).

NOTE: First Round Capital is one of the few places I see creating amazing and informative content in this specific area of need.

2. Young = stupid: Most of the founders are young, and young people are inexperienced, which might be great for a lot of reasons (energy, enthusiasm, flexibility, no assumptions), but it almost automatically makes them stupid at entrepreneurship.

I was exceptionally stupid when I was young, so I speak from experience here, but without an experiential framework to fall back on, you have no way to understand and solve many of the hundreds of problems that come up when you start a company. The younger you are, the less experience you have, the harder this whole thing is.

This doesn’t mean young people can’t excel at entrepreneurship. Yes of course some young people can and do build companies and become amazing CEOs.  Please, do not point to Mark Zuckerberg and Evan Speigel as your rebuttal; they are by definition the exceptions that prove the rule. For every one of them, there are 50 founders who torpedo their previously hot company by making all the standard mistakes of youth. Ask any VC you know to tell you those war stories. They have way more of the bad than the good.

I have seen this play out firsthand in my own investments. I can think of two portfolio companies specifically, both of which have raised major rounds from big name VC funds, where I have to actively refrain from punching founders in their stubborn, arrogant faces.

Almost every decision they make is wrong, and the worst part is that I can see precisely how they reason themselves into the wrong decision, and I take pains to point out exactly where the reasoning is wrong, what will happen, and the right way to go.

Do they listen to me (or their other investors)? No.

These two founders have done what Mark Zuckerberg said about Twitter, “They drove a clown car into a goldmine.” They’re young and arrogant and inexperienced, and their little bit of success went right to their heads, and so they think they know everything. I’m watching two amazing ideas that should grow into amazing companies get destroyed by the inexperience and arrogance of their young founders, and it drives me nuts.

Side Note: They are both young males, and young males are especially susceptible to this. I like investing in young female CEOs and older CEOs (either gender) MUCH more than younger males. In my experience, they listen to people, they don’t assume they know everything, and they make smart decisions based on good principles, not ego-driven impulses.

Studies bear out the wisdom of this preference: both women do better and experienced people do better at starting companies than young men, and the best VC on earth agrees:


Which brings me back to my original point: there is so much money chasing so many good ideas, but there are very few founders who can effectively execute.


So why did this make me stop angel investing?

1. Because the next 2000 and 2008 are inevitable. And it won’t be be pretty.

When that tide comes back in, a lot of of these companies are going to drown. Not because their ideas or businesses are bad, but because the founders have no idea how to run a company, and like Ben Horowitz says, you see who the real CEOs are in times of stress, not abundance.

There is an anti-bubble in talented people–a black hole, and I’m not about to get sucked in past its event horizon.

2. Angel investing is a poor use of my time (relative to other things)

Even though angel investing looks like this casual, easy and fun activity, make no mistake about it, if you want to avoid losing your shirt, you spend a LOT of time on it: finding deals, vetting companies you’re interested in, and then once you invest, working with them like hell to make them succeed.

Just one example: I invested in a custom dog toy company, PrideBites, and have probably spent at least 500 hours over two years learning about the dog toy space, the dog retail space, and the complexities of Chinese manufacturing and logistics (so I can better advise them). Not to mention, another 500+ hours I’ve spent with the team helping them through all the hundreds of issues that come up.

Yes, these are young guys, and yes they are inexperienced and stupid, but the difference is they listen, and they take direct instruction well, and they have rapidly gotten better, and their company is doing great because of how much they have personally grown and learned.

That’s almost a full time job–and it’s only ONE company.

Could I do this with all of the companies I angel invest in–spend my time helping the founders develop? Yes. And if I really vetted my founders well, and really spent time with them, then wouldn’t that solve my issue with investing in experienced founders?

Yes it would, that’s a very good observation, you’re right to call me out in it. In fact, that’s what a good angel SHOULD be doing.

But that’s also why I had to pull the plug on angel investing; to be truly good at it would take serious time, and that is not how I wanted to spend my time. This is one of the big principles of wealth building (and lifestyle design) that most people ignore:

You should spend the majority of your time on the highest valued use of your time, and delegate or outsource everything else.

You remember above where I said there are so many great ideas for companies, and so few people who can execute them? Well, I’m one of the people who can execute, who can take a company from 1 to 10 (at least for some ideas), so I had to decide which would be the better use of my time: angel investing, or building one of these great ideas into a company?

This was not an idle question for me. In fact, I was forced to make this decision quickly and under stress.

In 2014, a new business fell into my lap.

Completely by accident, I figured out a way to turn book writing and publishing into a service, and one that was really effective for turning the knowledge and wisdom of professionals into a great book (in only 12 hours of their time). The company took off before we were ready–we did 200k in revenue in two months, without even marketing–and I found myself having to cancel meetings with the companies I’d invested in, work late into the night, and saw the time with my family suffer (time that I try to hold inviolate to business intrusions).

I had to make serious decisions about where I was going to spend my time, because I did not have enough for both worlds.

I did two things:

  1. I calculated the expected value of each path, i.e., how much money was I likely to make.
  2. I thought about which path was more important to me in non-financial terms.

I won’t deeply explain expected value (Wikipedia explains well), but essentially it’s a way to assign an actual dollar amount to various decisions, i.e., how much am I likely to make on each path? Some basic calculations showed that expected value of the start-up was higher (though not by much).

But that wasn’t the deciding factor. I have decent money, more than enough to not have to make decisions based on money only. For me, the deciding factor was asking myself:

“Why am I doing this? What really matters to me?”

What’s always mattered to me is working on something I enjoy that creates something new and positive for the world. Whether it was creating entertaining books or a new publishing service or a new way to write a book, the desire to turn nothing into something in a way that solves a real problem and creates real value has always motivated me.

That’s not what you do as an angel investor. What you do is help other people turn nothing into something.

Both paths are valid, but the second one is not a huge motivation for me personally. I’m sure the day will come when I am tired and want to just use my wealth and wisdom to help the next generation build the tools of the future. But I’m still young, and I still have my most productive business years in front of me. If I’m not going to spend it working on the hard and interesting problems, then what I am doing? Investing my money for what? To get rich on the labor of others, while I complain that there isn’t enough talent solving the hard problems? That would be seriously hypocritical.

Beyond that, I internalized some disturbing things about myself when I was angel investing.

There’s a reason that Shark Tank is the highest rated show on TV; people love the vicarious thrill of being able to sit in judgment of someone else asking you for something. It’s like a modern version of medieval serfs petitioning their lord. That is compelling spectacle, but let me tell you, it is even more compelling when it’s you they’re begging from.

Few people are willing to admit this about angel investing, but it’s clearly true, so I’ll say it:

Perhaps the biggest thrill in angel investing is that people flatter you and beg you for your resources, and this makes you feel powerful and respected.

Anyone who says that isn’t a draw of angel investing is lying. It drew me in (at least at the beginning). I would say that this is the motivation of the majority of the amateur angels I see out there too. They like how it makes them feel.

But the thing is, it’s a cheap thrill. You aren’t really doing the important work–the entrepreneur is the one doing the important work, not the investor.

It’s a false feeling of importance, and though it can be intoxicating at first, I quickly realized how hollow and unfulfilling it really was. I wanted to actually do important work, not just feel good about someone else doing work.

It’s a basic question we all have to ask ourselves: Do you want to be in the arena, or are you OK on the sidelines?

Both are valid, but personally, I gotta be in the arena, competing, putting myself on the line. I can’t just watch.

Once I understood this, the decision to stop angel investing was pretty clear. This is such an important lesson, and so few people understand it, so please understand this if you don’t already:

The only thing you can’t replace is time. Deciding how you spend it is the most important decision in your life.

Why You Should Not Start Angel Investing

Those are my personal reasons I stopped angel investing. They may or may not apply to you. But even if they don’t, you should still NOT angel invest. Here’s why:

1. The economics of angel investing work against all but a select few


If you do not understand that quote, then you should NEVER PUT ANY MONEY IN A START-UP, unless it’s money you are fine setting on fire and throwing out of a window, because that’s what you’re doing.

Peter Thiel gives a long explanation of power laws here, but Sam Altman explains it quickly:

“Everyone claims that they understand the power law in angel investing, but very few people practice it. I think this is because it’s hard to conceptualize the difference between a 3x and a 300x (or 3000x) return.

It’s common to make more money from your single best angel investment than all the rest put together. The consequence of this is that the real risk is missing out on that outstanding investment.”

He continues on to explain what this means:

“Don’t try to get good deals on valuation and hope for these 20-30M exits because too many things go wrong…and if you look at people who have been really successful angel investors, they’re the ones that take bets on founders and ideas that they believe can be huge, and cheerfully lose their money a lot of the time.”

This means two very specific things. The only way to be a truly successful angel investor is to:

  1. Invest in a ton of start-ups, be cool with watching most fail, and,
  2. Have enough money to do both initial investments, and serious follow on round funding (at least pro rata, because tripling down on that one company that makes your whole portfolio is how you make pretty much all of your money)

You may think you understand this, but you probably don’t.

Paul Graham explains more:

“In startups, the big winners are big to a degree that violates our expectations about variation. I don’t know whether these expectations are innate or learned, but whatever the cause, we are just not prepared for the 1000x variation in outcomes that one finds in startup investing.”

Because YC understands this well, they’ve structured their whole program to search for these companies, and explicitly pick companies based NOT on who is highly likely to be successful on a low level, but on who has a SHOT at being one of the mega winners. This means they are reducing their “win” rate so they can increase their “homerun win” rate.

OK, fine, let’s say you understand power laws really well, and you have a ton of money, so you are willing and able to put five figures into 100 companies to ensure you hit that one massive Uber-like homerun.

Well congrats, that’s just the table stakes to get in the game. You still have another major problem.


The other problem is that there are, at BEST, only a few of these massive home run companies formed each year. You think you can predict, out of the thousands of start-ups launched each year, which ones will be the winners?

A lot of people think they can. Almost all are wrong.

But here’s the most messed up part: even if you can reliably pick the winners with some degree of certainty, you’re still probably going to lose.

Why? Because you probably can’t get into the winners.

This is because the best companies (at least in Silicon Valley) tend to get identified early, and as a result, they have a lot of people trying to put money into them. And to even be able to put money in, you have to have a way in, which means one thing:

It almost always takes the right social connections to get into very early stage companies.

Let me be super clear about this: all the great deals I got into were because of my social network. That’s it. No other reason.

This is (basically) true for pretty much every other angel investor. You win because of your network.

This means that only a certain type of person can truly be successful angel investing. Here are some examples of the type of people who win consistently and win big at angel investing:

Paige Craig

Chris Sacca

Elizabeth Kraus

Kevin Colleran

Shervin Pishevar

Gary Vaynerchuk

Scott & Cyan Bannister
What separates them from everyone else?

  1. They have a solid reputation built over a decade (or more) as great people who work hard for the companies they invest in,
  2. They have deep and vibrant networks in relevant start-up fields, built by doing a ton of things for other people (or because they are former founders or employees of tech companies, or both),
  3. They have the money to double and triple down on their picks, and wait a decade for them to pay out,
  4. AND they have something key that I’ve left out: they have the social clout to not get run over by VC’s and literally pushed out of an investment. Oh, sorry, even the big angels have to worry about that.

Do you have those things? Because the people you are competing against do.

Seriously, read this post just about what Chris Sacca does for his companies. Or read about all the things that Paige Craig did just to get in the first raise AirBnb ever did. Paige does this for dozens of companies, which is why Paige is such a sought after angel that the best companies go to him. [Full Disclosure: I know Paige well. He’s helped me so many times I could write a love letter about him.]

You probably can’t come close to doing what these people do as angels. If you’re you can compete, well maybe you’re right. But realize that thousands of other people have read the same things you have, and are taking classes on this now.

You are not alone, and you are way behind, and it’s getting harder and harder to build the skills and networks necessary to compete, and more and more money is chasing fewer and fewer capable entrepreneurs.

In fact, if there’s a bubble anywhere, I think it’s in the number of angel investors.

I bet you saw the blog post the AirBnb CEO put up a few months ago, showing the seven rejection emails he got raising his first investment. I was forwarded this by a few people saying things like “I would have known this company was a hit, I should angel invest.”

Maybe so.

But here’s what you aren’t seeing: That email was only sent a handful of people, all of whom were already established angels/VC’s. It wasn’t going wide. The best companies never do that. Unless you can establish yourself to be the type of person that Brian Chesky would think of to send that email to, you should probably not be angel investing.

That’s why I’m telling you to not angel invest. With the exception of a very specific type of person who, like Liam Neeson in Taken, “has a very specific set of skills” and makes this their full-time focus and goes all in, the entire structure and economics of angel investing works against you succeeding.

If You Must Angel Invest, How Do You Do It Right?

The best way to invest in start-ups is to be a Limited Partner in a VC fund that’s run by someone who can do this. You pay a 2% fee and 20% of the take, and for that, you’re buying all of those skills and connections. That’s what I exclusively do now (and that’s probably where the vast majority of my returns will come from, those funds I invested in).

But that is really dangerous too. Why? Because most VC funds LOSE MONEY.

You need to know who to even invest with, and then hope you pick the right fund. And to do that, you have to have the connections to get into them because the best funds can pick their LP’s…and you’re now back to the same networking problem we just talked about.

Is there any other way to invest in start-ups, and avoid at least most of these issues?

Right now, I can only see one effective method for an average person to get reliable and (relatively) safe access to high level angel deals:

Use Angellist Syndicates

These are the safest, most reputable way for a small time, no connections investor to get into serious deals. Angellist is doing something pretty amazing here, and it doesn’t get the press that it should. This has real potential to change the start-up investing world for the better.

Most of the angels I linked above have a syndicate, and there are more listed here (Tim Ferriss and Naval Ravikant are two other good syndicates to be in). No, I get nothing if you join their syndicate, and yes, I also have a syndicate and I didn’t link it because I’ve never used it and I don’t recommend you join it.

If you want to allocate some portion of your portfolio to angel investments, this is probably your best option. But I would read EXTENSIVELY about this before doing it. The risks are real.

What About Equity Crowdfunding?

I used to think equity crowdfunding would be amazing. I was a huge cheerleader. And I still think it will be…someday.

But right now, it’s mostly a bad deal and I recommend that most people avoid equity crowdfunding.

There are a lot of reasons why this is true; I could tell you the story about how I got screwed out of what should have been an amazing exit because of a platform that failed to negotiate an adequate liquidity preference.

But I think this tweet storm (and story) by Jason Calacanis might be the best summary of the reason equity crowdfunding is very problematic right now:


What he is describing is a basic pump & dump scheme, and you are going to see a huge number of people scamming and getting scammed through equity crowdfunding in the near future.

The sad reality is that people are ALREADY getting screwed left and right in equity crowdfunding, and they don’t even realize it, and you don’t hear about it because it’s in NO ONE’S interest to tell you the truth.


Because everyone is making money–except the small investors using equity crowdfunding platforms.

Personally, I would avoid ALL equity crowdfunding for right now. Let other people take the risks, lose, get pissed, and eventually we will find equilibrium in the system.

Equity crowdfunding will be amazing and totally worth it someday, but not today.

Conclusion: Don’t Angel Invest To Generate Wealth, Build Companies Instead

I did win at angel investing. Barely, and I did it with a ton of advantages you probably don’t have. And even I’m getting out, because I know so much of my success was luck.

If you must invest in start-ups, then use Angellist syndicates.

If you really think you want to be an angel, do it full time and 100%, otherwise you’re setting yourself up to lose.

For most people, you’re better off spending your time and money learning skills and building the company yourself (or even better, join a great company stage early and help them on their journey, it’s safer and you can make a ton of money still).

The best opportunities out there for most people are in creating, not investing. Kevin Kelly said it best when he said we are only at the beginning of the incredible changes coming, and that most of the best ideas are still out there.

Find one and make it reality, like I am.

This article was originally shared on Startup Grind. 

About the Author

Tucker Max

Tucker Max is the co-founder and Chairman of Book In A Box, a company that's created a new way to turn ideas into books. He has written three #1 New York Times Best Sellers, which have sold over 3 million copies worldwide. He's credited with being the originator of the literary genre, “fratire,” and is only the third writer (after Malcolm Gladwell and Michael Lewis) to ever have three books on the New York Times Nonfiction Best Seller List at one time. He co-wrote and produced the movie based on his life/book, also titled “I Hope They Serve Beer In Hell.” He was nominated to the Time Magazine 100 Most Influential List in 2009. He received his BA from the University of Chicago in 1998, and his JD from Duke Law School in 2001. He currently lives in Austin, Texas, with his wife Veronica and son Bishop.

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