I always assumed angel investing (at least as it emerged originally) was essentially philanthropy with the motivation being it gave very rich people a way to nudge things they liked into existence and provided them with a semi-cheap way to keep their network fresh with young, hungry, interesting new people. Bonus it might very occasionally turn in to a lottery ticket (but that wasn't the primary driver of making the investment).

I've heard variations on this sentiment repeated a lot. The exact message varies, but it's usually some variation of: early investors always lose, small investors always lose, and/or non-preferred shareholders always lose. I've seen and lived a small number of personal anecdotes that seem to back this up, and I'd like to better understand what underlying pathology causes this.

I understand that early investors are taking the most risk, and clearly there's a lot of downside. But what prevents them from being able to realize or capture the upside?

I've heard a theory, a few different times now, that bigger, later investors effectively collude (descriptive term, not value judgment) with founders to squeeze out early founders and employees (common shareholders) via unfair terms, such as excessive dilution (accepting too low a valuation for larger investment), excessive liquidation preferences (2x or more), etc., and then topping the founders up via side deals. I've heard that, by virtue of squeezing out passive participants, they're able to offer more to the founders, and that incentivizes the founders to take their deal over other alternatives. Does anyone know more specifics about how this happens? In particular, how is this not a breach of fiduciary duty to passive participants?

It's definitely possible to write anti-dilution clauses, etc. But, I've heard that more or less no one writes them, and more importantly no one accepts them. If this is a pretty well-known game, why haven't countermeasures become popular?

For my personal anecdote, I was once an early engineer - the first hire after their Series A - at a small startup that never found product-market fit. The economy was bad, and they were running out of money, and they took - as I understood it - a dubious Series B led by a dubious investor. The founders were very vague about the terms of the round. In particular, the founders revealed that the investors took liquidation preference, that it was greater than 1x, but absolutely refused to say how much. That always left a bad taste in my mouth. When I left, I didn't exercise my options. In the end, the company floundered, and is a zombie to this day. In that regard, I suppose that the particulars of that round don't really matter - none of us were seeing anything regardless.

I'd really appreciate if anyone closer to the money part of this industry could weigh in.

With much love for my angel investors, angel investing is absolutely a mug's game.

If the company doesn't get off the ground (vast majority of investments) you lose all your money.

If the company does get off the ground, you are the lowest on the pref stack, and you have no ability to follow on to protect your position. You're not a contributing employee or meaningful future source of capital so your piece of the pie is just dead weight on the cap table. This means every single subsequent investor (and the founders, if they care more about money than their relationship with you) has an incentive to cram you down.

So net net the chances of success from passive angel investing are only slightly better than playing the lottery.

Best approach would be to make very few investments, where you're able to build a special relationship with the founder, and ideally get a board seat to defend your stake.

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Edit - to be clear, I don't think startups should be giving board seats to angel investors. It does happen in exceptional cases where the angel is uniquely valuable to the company, and those are the cases where the angel can defend themselves. But they are rare, which is why it's mainly a bad game to play.

From chatgpt: “ In summary, Halle Tecco’s personal portfolio comprises about 34 direct investments, of which 24 have at least one female founder (as detailed above). This means roughly 70% of these companies were co-founded or founded by women. Notable female-founded companies in her portfolio include Everly Health (Julia Cheek), Cityblock Health (Dr. Toyin Ajayi), Kindbody (Gina Bartasi), Tia (Carolyn Witte/Felicity Yost), Hued (Kimberly Wilson), and many others listed in the first section. Halle Tecco’s investment focus has clearly encompassed a large number of startups with women on the founding team, aligning with her advocacy for female entrepreneurs in health tech ”

Call it charity or call it buying gal-pals with hubby’s money but primarily investing based on identity seems like a bad idea

>Angel investors also face the longest time horizon for liquidity of any investor. Private equity aims for 3-5 year returns, and VCs typically run 7-10 year fund cycles, but angels usually wait 10+ years for exits. This means angels aren’t just taking company-specific risk, but also the risk of facing more macroeconomic cycles.

>Think about all that's happened since 2009 when I started: multiple presidential administrations, a global pandemic, zero interest rates, and now high inflation and higher interest rates. My investments have had to withstand all of these shifts, and many didn't make it through.

Really interesting stuff (for me, as an outsider).

Can anyone comment if VCs are looking for shorter fund cycles or are the macro economic shifts what's capping it at 10 years?

I once read one reason why startups take so long to IPO is so private investments can benefit longer from the growth