How to be an angel investor in early stage startups when you don’t have any money

Being an angel investor is quite trendy now and so, as inevitably happens when something becomes trendy, I’ve recently started to see a ton of backlash harrumphing against young people angel investing “to look cool on twitter when they can’t afford to”.

this is what I imagine everyone tweeting against angel investing looks like

Personally, I do the weirdest shit to look cool on twitter, and I have tons of fun and dope opportunities have come my way because of it. If anyone tells you it’s not a worthy objective it’s because they are resentful their parents didn’t let them have fun as a child and so they insist on validating their own experiences by attempting to perpetuate this trauma unto you. Make like the buddha and just walk away from that.

Seriously, I do ALL kinds of bizarre things for made-up internet points

By investing in private companies I’ve learned tons: deep insights on the industries that startups are building in, and I’ve also developed skills on the meta level like how to evaluate the total market size for an opportunity, what are different ways to represent business fundamentals, and what types of companies are most attractive for downstream investors.

I’ve built a reputation with people I’d dream to work with one day, and attracted cool opportunities that could catapult my career and potential future earnings forward. (Pro-tip, use the phrase “building a reputation” when speaking with baby boomers and needing to justify looking cool on twitter)

I haven’t made any money 😂 But I believe because I’ve put in so much time towards thinking through what makes for a promising company, I’ve made asymmetrical bets and that my equity in private companies will actualize into returns for me later. The path to building a great company is tumultuous, and so I appreciate the lack of liquidity as a feature, not a bug. I also think my life will be improved more by having a chance of lots of money 10+ years in the future than guaranteed small amounts of time and money now. Same reason why people buy lottery tickets.

(Even if every investment I’ve made goes to zero, I think that prioritizing angel investing — even before I’ve maxed out my 401(k) — was a smart early career bet. Hey, it’s a less expensive bet than getting an average bachelor’s degree!)

Certainly the easiest way to be an angel investor is if you have the money to do so. But look, everything is easier if you have money, and that hasn’t stopped ambitious 20-somethings from working their assess off to achieve great things before. If you want the advantages of being an angel investor but you don’t have any money DON’T WORRY there are still a bunch of ways to exercise and build the skillset of being a great investor, earn internet points, and get equity in early-stage companies as a long-term bet.

How to Angel Invest When You Don’t Have Any Money

I created this 2x2 matrix (startups use a lot of these) to help you find the best option on how to angel invest when you have no money — it all depends on where you’re starting from in terms of knowledge and network.

If you don’t have a network of founders and you don’t know that much about businesses, spend time on sites like Republic and Angellist. You can invest in startups raising there and get equity, but the best part is that you actually don’t have to invest at all! You can still learn a ton from the companies that are raising on them by perusing their decks, weighing valuations, seeing how much they go on to raise, etc. You do have the option to invest (starting at $10) and when I invest — my Republic investments are here — I almost always invest just the minimum investment size.

Investing the minimum check size is not a good strategy for a skilled investor to make money BUT it is an excellent strategy to maximize learning per dollar. With a small investment, I can continue to get updates from the company over time, advance my understanding of the value of the investment, and get a whole lot of tries at bat.

I use Alto IRA (referral link) on both Republic and Angellist because of the tax benefits and the structures just make sense — here, Jeff said it better than I could have on twitter.

There are a few downsides to using “crowdfunding” sites like these, including that you can’t invest in just any company you want (although I have some bad news for you on this front about angel investing️️™️) and you don’t necessarily get to meet the founder of the company (for me the most important factor in making an early-stage bet).

  • Learn things ✅
  • Build a reputation 🦚 you can if you’re active on twitter etc. about your investments though it’s a bit harder than angel investing ™️ because your name isn’t on the cap table
  • Private company equity 🐢 if you put some money in, you will get equity in the company

If it seems like everyone you know is starting a company but you don’t know which ones are good — trust your gut on which of your friends you think will build a big company, and write tiny checks to support them and get equity. This is the only strategy I’m recommending that definitely requires some money, but not as much as you think.

It is totally viable to write small checks like this — not every founder will take them but if you’re friends they likely will.
Great advice from Alex for founders on how they can take all these small checks from their friends without the disadvantages.
  • Learn things ✅ by writing tiny checks, you get to go through some cycles of making a decision on who to invest in and seeing how it plays out
  • Build a reputation ✅
  • Private company equity ✅

It’s no surprise that this strategy brings all the benefits angel investing ™️ is associated with because the only way it’s different is that sometimes, when if a founder follows Alex’s advice above to create an SPV, your name won’t be on the cap table.

How much it builds your reputation and how much your private company equity is worth basically depends on how lucky your friends get 🤷‍♀️

If you don’t have a network but you have a lot of knowledge, you should be a fantasy angel investor. I think this is quite a good idea, and so I’m sure it’s not mine, but I can’t remember where I saw it so apologies for not giving you credit! (Comment below if you know whose it is, and you too can have 🤡 internet points).

The premise is simple: give yourself an imaginary angel investing budget like $100k/year. Then, throughout the year as you learn about new companies, research them, decide which ones you would invest in, and lock in your “allocation” by publishing write-ups/investment theses on them. Track your “portfolio” and publish annual updates on how your investments have delivered since you decided to commit. Hold yourself accountable here cause it’s too easy to Monday morning quarterback, and you’ll rob yourself of valuable post-mortem style introspection if you don’t have the rigor here that matches check writing.

  • Learn things ✅ you exercise your skills of finding out about companies, evaluating them, and being critical of your analysis
  • Build a reputation ✅ publishing public write-ups definitely could help you build a reputation
  • Private company equity ❌ you don’t get equity, but damn you might meet enough people to transition to the small checks bucket.

Sure, Packy McCormick is an investor — but you could do a lot of amazing analysis and write-ups on business strategy like he does without cutting a single check.

Ok if you’re good at this and you know lots of people, the stage is set to become a startup advisor. You can help companies, come up with go-to-market strategy ideas, review product specs, provide a shoulder for founders to cry on, source and recruit candidates for them, even introduce them to customers that could become key logos on their home page.

The most common arrangement I see is for startup advisors to get an advisory grant for ~0.25% of the company that vests over two years. The advisor meets up with the company to offer support and advice every month or two. Boom — equity, no money needed.

Every possible permutation exists for these advisory agreements, but remember most founders are first timers who’ve never had official advisors before. Don’t wait for a founder to invite you to be an advisor. It is perfectly acceptable to design an exchange of value that makes the most sense for you and propose that to the founders (understanding they may reject it or negotiate from there.) I even have some friends who offer different packages (x hours each month in exchange for y shares) and let the founders choose what works best for them.

It was a bit uncomfortable for me the first time I suggested codifying my relationship with startups in this way. (and, make no mistake, I’ve had a gazillion companies turn down my proposals!) Getting comfortable with the process of discerning what stage a company is at, what I have to offer them, deciding what I want from them in exchange, and building a bridge that ties those things together is wildly relevant to my journey towards becoming a skilled investor though. Put the work in, it’s worth it.

  • Learn things ✅ if you try to evaluate the companies you advise as if you were investing capital instead of time into them, you’d get great feedback on your decision-making process
  • Build a reputation ✅ It’s a bit harder to build a brand as an investor specifically with advising, but you could definitely build a reputation as an advisor
  • Private company equity ✅ One of the big advantages of being an advisor is that you do get startup equity, and could get some idea of what your financial performance would be if you invested money instead of time. Conveniently, 0.25% is about the same amount of equity you’d get investing a $10,000 angel check into a company with a $4mm cap (it’s common not preferred shares, but whaddaya gonna do).

There’s a bunch of hullaballoo about being an accredited investor. The reason you have to be accredited to invest in private companies is because there isn’t as much transparency or oversight to prevent you from losing all your money. It’s the same reason driving a car without seatbelts is illegal — to protect you. In most states, you need a seat belt on all public roads — you for sure will not get in trouble for driving to the end of your driveway. Like most rational people, I advise you to wear a seatbelt on the freeway. And if you have a history of backing into your mailbox uh, you should buckle up as soon as you sit down in your car. If you’re looking for hard and fast rules or guidance on being accredited, early-stage startup investing might not be a good fit for you because it’s also a personal decision weighing risk and reward.

Because angel investing has done so much for me and people often ask me how to get started, I wrote this guide on how to put time and energy into the startup scene to make the benefits of angel investing more accessible. Putting money into ETFs is super outdated advice because you don’t learn shit, it doesn’t do anything for your career and you’re not going to make enough money to catapult you across class boundaries. Meanwhile angel investing can help you learn new things, develop skills, build a reputation, have fun, and (potentially) create long-term returns. Good luck and have fun!

according to @pburke24 “founder of Pinch and a Bellinghamer! Also, a very cool person who tweets interesting things about startups and other stuff”

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