Lessons for Budding Angel Investors from Y Combinator’s AngelConf: Part 1

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hopefully you can walk away from them, and if you can remember what you learned that is invaluable. You can only learn by doing. XG has done exactly that. We have invested in 20 to 30 companies in the last three years. There is a lot of risk involved, but if you are making some calculated bets, you can win and have fun along the way.

Time: We’re all pretty busy. One of the interesting things about angel investing is that you can be a weekend warrior angel, or you can make it a career out of it. I have chosen it as a career. It didn’t start out like that, but I really like spending time with other investors and angels.

Knowledge. It’s important to understand what you’re investing in. If you can’t explain it to your mom or dad or uncle, you probably didn’t make a good investment. And anyone can write a check, but it’s another thing to roll up your sleeves. If you say you’re going to be available, you better make good.

Money: It’s important to decide ahead of time how much risk you are willing to take. Think of it as your Vegas money. You will probably lose a lot before you win anything back.

People: You have to enjoy the people you work with. We probably see each other at XG more than any of us sees our respective spouses. It’s the same with entrepreneurs.

Lastly, have fun, have passion. Does this excite you? Are you saying every day, “God, this day is going to be so different, I have an amazing week ahead of me?” Are you going to enjoy the journey?

Paul Graham (Y Combinator) on the increasing power of entrepreneurs in the fundraising process:

The way funding rounds used to work, as a founder you would try and find someone to lead your round…Those days, thank God, are over. The way of the future, I believe, is rounds with no fixed amount, no closing date, and no lead. There will be no manager. There will be some guy who, chronologically, writes the first check, but the startup will run the process. They will go around soliciting investors. They will say “We’re selling X amount of stock for Y dollars, are you in or out?”

The reason things are moving this way is because the old way sucked for founders. It took an inordinate amount of time, and you were hugely at the mercy of your lead. In the worst case, your lead was in collusion with other investors to drive your valuation down. And however energetic the lead, he wasn’t a tenth as energetic as the founders. So here is a megatrend for you—and it’s an idea that Y Combinator itself has been based on from the beginning. The founders are going to be more and more powerful relative to investors.

If you want to know what the future of investing is going to look like, think of what the founders would like it to be like. If you’re an outfielder and you want to be successful, figure out where the ball is going to land. If you’re an angel, act now like you’re going where the founders will be able to force everyone to be in 20 years, and you’ll be very successful.

Continue to Part 2.

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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