Why I stopped angel investing after 15 years, and what I'm doing instead
State of Angel Investing & Returns
- Many argue there is now too much capital chasing too few good startups; promising companies reach high valuations quickly, eroding upside for small early investors.
- Several commenters say angel investing is a “mug’s game”: most companies fail outright, and in the few that succeed angels are at the bottom of the preference stack with no leverage or follow‑on capital.
- Hit rates discussed: even top VCs with best access and deep diligence only get ~1–5% big winners; angels with worse access and tiny portfolios are statistically disadvantaged.
- Follow‑up stats from the article (≈$0.31 returned per $1 invested so far) are cited as evidence that broad‑based angel portfolios often underperform simple index funds. Some respond that this mainly shows the author wasn’t good at picking.
Structural Disadvantages: Dilution, Preferences, Recaps
- Explanations of how early investors and employees get wiped out:
- Successive rounds dilute common shareholders; liquidation preferences stack so later preferred investors get paid first.
- Fire‑sale exits or down‑round recapitalizations can leave nothing for early shareholders, even if the company is “acquired with fanfare.”
- New investors may demand cap table “resets” (especially after pivots) that effectively treat the company as new and wipe earlier holders.
- Founders may be “topped up” with new options or cushy salaries while common shareholders and angels get nothing.
- Several ask why this isn’t a breach of fiduciary duty; answers emphasize that the alternative is often bankruptcy, giving late investors strong leverage and leaving early holders with little practical recourse.
Board Seats, Governance & Power
- Typical early boards: ~3 members at seed (2 founders + lead investor), then 5 at Series A (adding new lead + independent). There simply aren’t enough seats for multiple angels.
- Angels are usually minor check‑writers in “party rounds” (often via SPVs), with no real ability to negotiate terms or defend their stakes.
- Some suggest angels should seek board seats or strong terms; others respond that angels cannot realistically demand this and that no terms will save them if the company is failing and must accept harsh financing.
SAFEs and Legal Terms
- SAFEs are criticized as:
- Providing fewer protections than equity,
- Being misused to “implicitly price” rounds anyway,
- Creating later disputes around valuation and conversion.
- Uncapped SAFEs with discounts are proposed as more honest for founders; investors push back that uncapped deals are unattractive and risky for them.
Motivations for Angel Investing
- A substantial thread argues angel investing is often about:
- Status (“I was early in X”),
- Networking and favor‑trading,
- Access to unfiltered market information,
- Personal enjoyment or “giving back,” rather than pure financial return.
- Others see it as a stepping stone to “real” VC jobs by building a track record, not necessarily as a rational standalone asset class.
Alternatives: Bootstrapping, Smaller Exits, Public Markets
- Some advocate bootstrapping and avoiding outside capital entirely, especially now that building software is cheaper (e.g., with AI tools).
- Proposals for backing smaller companies with modest exits (e.g., $500K in, $10M out) are challenged as unlikely to meet venture‑style return expectations for LPs.
- Multiple commenters note that, historically, simple public index investing over the same period would have outperformed many angel portfolios with far less stress and time.
Macro Environment & Historical Shift
- Post‑ZIRP conditions (higher rates, tighter money) are seen as exposing how fragile many angel‑backed companies were.
- A historical framing notes that “angel” once meant financing deals nobody else would touch; now, a thick layer of institutional capital competes for the same startups. More capital supply and professionalization naturally compress returns for small, late‑arriving angels.