A Weird and Wacky Approach To Angel Investing

Written By: Dharmesh Shah March 24, 2021

An Odd Start To My Angel Investing

I started my first company at around the age of 24. It was called Pyramid Digital Solutions and it was a CRM (Customer Relationship Management) company in the financial services vertical. I bootstrapped it, ran it for about 10 years and then sold it to a large software company in an all cash, no attachments deal. Now, I had something I’d never had before -- liquidity. Or in simpler terms -- money. Which, as it turns out is a highly underrated thing (more on that in another blog post). I didn’t make enough money whereby I’d go off buying planes and yachts and such (not my style anyway), but it was enough that I didn’t really have to work anymore.

I did not plan to do another startup. I had done it for 10+ years and lived the notorious startup life. I’d told my wife I was ready to hang up my entrepreneurial hat and get on with the next chapter of my life. To do that, I took the next logical next step:  I enrolled in graduate school (at MIT) working towards an “M.S. in the Management of Technology”. Yep, it’s as cool as it sounds. Kind of an MBA for geeks. I’d always liked school, but never really got to enjoy it and immerse in it, because --- well, that just wasn’t the life I had. Until now. Now, I could pour myself into graduate school and actually enjoy it -- which I did. My loose plan was to get my Masters degree, then possibly get a PhD, and then maybe teach.

My conviction to not do startups lasted only a few...weeks. Best laid plans and all that. 

During classes (which I loved), I missed the startup life. So I thought of an idea: Why not invest in startups? That way, I still get to stay in touch with the thrill of startups, but I could do it vicariously through other entrepreneurs.

Angel investing is like having a niece or nephew. They’re adorable and fun but then you get to hand them back to their parents and go back to your life -- and get some sleep.

My thesis was: I’d get to brainstorm and strategize with the founders, but then I’d get to hand their baby back to them and go back to my (so called) life.

After some quick research (basically Googling for about 10 minutes), I discovered that you didn’t really have to train or be certified to be an angel investor. There’s no skill that was required. There was one simple requirement: You had to be able to afford the risk and that was simply measured by how much money you had -- or how much money you made. So, I discovered that lo and behold, I was a legit accredited investor. So, all I had to do to become an angel investor was to start writing checks.

But, where do I find these mythical startups to write checks to? And, how do I pick them? And, why would they take money from me? As fate would have it, that first year of grad school, I was enrolled in a class at MIT called “New Enterprises”. It was for learning entrepreneurship. (That was not a required course -- I picked it).  During the first week of that class, we all had to do a short pitch of a startup idea and convince our classmates to join our “startup”.  Then, the students would “self configure” around their favorite 5-6 ideas and form startup teams. I pitched a startup called “HubSpot”, which ended up being one of the ideas chosen. Two other ideas that were chosen were “Visible Measures” and “PawSpot”. Both were actual companies (not academic exercises), and I decided to make an angel investment in both of them -- mostly because I really respected the two guys: Brian Shin and Mark Roberge. 

The Entrepreneur vs. Investor Dilemma

During my two years as a grad student, the idea of HubSpot became more and more real. I would get together with one of my classmates, Brian Halligan, and we would noodle on the idea. I’ll save the story of me and Brian for a different blog post, but suffice it to say, HubSpot ended up doing pretty well.  It is now the #1 CRM platform for scaling companies with over 100,000 customers. It is publicly traded with a market capitalization of over $20 billion.

Anyways, back to the story…

I had promised myself I would at least enjoy grad school before "officially" jumping back into a startup and so I held off on officially launching HubSpot until the day I  had my graduation ceremony (June 9, 2006).  I then wrote a seed round investment check of $500,000 to HubSpot. We were off to the races!

Not so fast...

This presented a dilemma for my fledgling role as an angel investor. I’m a big, big believer in focus. And I knew how all-consuming startups can be. So, I figured I’d have to give up the angel investing thing so I could commit myself completely to HubSpot. Presumably, angel investing takes a lot of time -- and I wanted all available time to go to HubSpot.

This was unfortunate, because I liked angel investing. And I thought it could help with the growth of HubSpot too, because I’d learn a lot. And someday, I hoped HubSpot would have many, many startups as customers. [Fast forward to today, HubSpot has thousands of startups as customers, and a special program, creatively named "HubSpot for Startups"]

Ultimately, I came up with a hack which changed everything.

Instead of solving for maximizing my investment returns, I’d solve for minimizing time spent.

If you know anything about investing, you will quickly (and correctly) come to the conclusion that that’s kind of a crazy thing to do. But, if I had to choose between not doing angel investing at all -- and doing it such that I spent near-zero time, I’d rather choose the latter.

So, I setup a weird and wacky set of rules/constraints for myself, all grounded in one simple principle:  Minimize time.

They went like this:

  1. No due diligence. Due diligence takes time. So, I won’t do it. Candidly, at that early a stage, I wasn't sure there was much diligence "due". In most cases, I wanted to deliver a yes/no decision within 24 hours -- and often the same day. I'm just going to write checks.

  2. No calls, no meetings. I’m not going to meet with founders or have phone calls with them. That takes time. I’m just going to write checks.

  3. No negotiating deal terms. I’m not going to “lead” an investment round, because leading a round usually involves helping set the “terms” of the deal (including valuation). And, that takes time and research (and is also unpleasant). Instead, I’ll just make it a rule to accept whatever the terms are that the founders or other investors have decided were “fair”. I just write checks.

  4. No follow-on investments. When startups go on to do subsequent rounds of funding, you often have to choose which ones you’re going to put more money into. That requires due diligence -- which I don’t do. It has the added problem of the “signaling effect”.  For those startups I didn’t choose to do follow-on investments in, it was a negative signal to the market, because people assumed I knew more about the startup than the average person, and if I’m not investing more, it’s probably not a good startup. To remove both those problems, I decided to not invest in follow-on rounds, at all. Professional investors think I’m an idiot because part of the value of making early investments is to be able to “double down” on your winners. But, I’m not looking to maximize return, I'm looking to minimize time. And also, this freed up more cash for early investments in other startups. So, I could just write more checks.

  5. No board seats or advisory roles. That takes time.
  6. No accepting “advisor shares” or other perks.  If I'm going to be a user of the product (which I often am), I'm going to be a paying customer. Accepting things for "free" leads to possible guilt for not spending time -- and I was not going to spend any time.
  7. Always side with the founders. If ever there comes a time when the founders are making a tough decision involving the investors (like whether to sell the company or not), always side with the founders. If they want to sell. Great. If they don’t want to sell, great. If they want to sell, but the acquirer is putting most of the money into the founders and team and little money is going back to the investors (which happens a lot) -- fine.

  8. Keep startup investments separate from HubSpot. I knew it would be tempting to get companies I had invested in to consider buying/trying HubSpot. It'd also be tempting to get HubSpot to use the products created by startups I had invested in. But, I also knew that would get messy -- and present potential conflicts. Even well-intentioned conflicts have to be explained. That takes time.

You get the idea. Whenever presented with a choice on how I should do my angel investing, I always try to ask myself: What is the option that involves minimizing the expenditure of time?

Shockingly, My Weird, Wacky Way WORKED!

I’m going to preface this section with an important note: DO NOT TRY THIS AT HOME! I am not recommending that anyone try and do what I did. Because what I did was not right.  It just happened to be right for me.

So, at this point, I’m an investor in 80+ companies (this is as of March, 2021).  Since I’m trying to minimize time, I haven’t tried to actually calculate what my IRR (internal rate of return) or even realized return is. But, all modesty aside, I think it’s stunningly high.

Here is a sample of some of my notable investments.

Okta. I was an early investor because I knew Freddie (one of the founders), since he went to MIT too. Today, Okta’s market cap (it’s a public company) is over $28 billion. That ended up being a 300x+ return on investment. Not 300%, 300 times.

If every other investment I had made in the past decade+ went to zero I would still be a super “successful” angel investor on that one investment alone.  (Related note: I’ve committed to Todd and  Freddy, the founders of Okta that I would be donating 100% of my gains in Okta to charitable causes -- thanks again, guys!)  

Dropbox: I have several “batches” of shares because two of the other startups I had invested in got acquired by Dropbox along the way, and I made a direct cash investment as well.  Dropbox is now public, market cap: $11 billion.

WP Engine. A leading provider of premium WordPress hosting.

Life 360: Went public.

Backupify: Acquired by Datto, which then went public. 

Creative Market: Acquired by Adobe.

A few other companies (still private, and growing) that you may know of: Buffer, Help Scout, Drift, Stack Overflow, Gusto, 15 Five, Crayon, Clearbit, Jebbit, Lola, Outschool, Reforge...

Oh, and I’m an investor in Coinbase which has been in the news lately and is rumored to have a valuation north of $50 billion. (Note: this is not investment advice).

Enough bragging. Point is, I did alright.  :)

You’ve Got Questions, I’ve Got Answers

Q: How do you pick which startups to invest in?

A: I tend to stick to what I know (software) and products that I’d use myself, or someone I know would use. And, I invest in people. If you’re thinking: “But wait, you don’t even talk to founders!”. You’re right. I mostly don’t. But, I have a different set of “inputs” (like late night emails). My #1 filter? Seek a low arrogance:accomplishment ratio. I love founders with humility -- and it has served me well.

Q: Why should founders take money from you if you’re not going to add value?

Not all of them should. But, often, they’ll have other investors that want to be more involved -- and provide guidance and help. They require a board seat. The upside to picking me is that a) my money is just as green. b) I strive to be the lowest-maintenance investor on the planet. I don’t ask for a meeting or a call. Or references. Or business plans (yuck!) or much of anything. I won’t blink an eye if this particular startup ends up not working out. I know that’s how things go, it’s part of the game.

Q: How should I pitch my startup to you?

A: Honestly, you shouldn’t. Of all the deals I’ve done, not a single one was the result of a cold outreach or pitch. Especially over social media like LinkedIn or twitter.  I tend to find startups I’m interested in myself. Often, they’re referrals through friends, accelerators like Y Combinator (congrats W21 batch!) and AngelList.

Q: What if I want to be an angel investor?

There are some exceptional resources out there. Look up Brad Feld and Jason Calacanis, they have really great advice and support resources for angel investing.

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