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Advice from an Angel Investor Who Made $100,000 Into $100,000,000 on How to Invest in Technology Startups

Entrepreneur in the technology sector Jason Calacanis also serves as an angel investor and hosts the weekly podcast This Week in Startups. He is the creator of a number of conferences that together business owners and possible investors. For the prestigious Silicon Valley venture capital firm Sequoia Capital, Jason served as a “scout”. With the help of this information, he rose to prominence as an angel investor. Jason has since made investments in 150 early-stage firms, four of which have billion-dollar valuations.

Angel provides a resource for investors in the twenty-first century to locate the businesses that no one else would fund. Startup failure rates are astronomically high. To make millions of dollars, you only need one of these startups to be a success. Jason Calacanis has over 25 years of experience investing in businesses with exceptional potential but are on the verge of disaster. The secret is to put money into the founder rather than the company’s current offering. The company’s future trajectory will only become more susceptible to larger ownership and control as a result of its current failure. Jason shares advice on how to pick the startups with the best chances of succeeding. Additionally, he offers the same strategies he used to make startup investments in multi-billion dollar companies like Uber.

What Is Angel Investing?

Angel investors like to fund startups that are under three years old. Additionally, these businesses are in financial trouble, have little to no goods, and are not listed on a public market exchange. This might seem like a prescription for failure, yet any firm can succeed with the proper entrepreneur. Importantly, you will be the kind investor who lends a struggling business the money it needs.

Results of investments may be largely random. This forces many people to invest in the passive income of index funds due to the unpredictable nature of investments. Other strategies, though, have much higher potential rewards. Leading investors use these strategies, which enable them to generate returns on their investments of 1000–10,000 times. Jason thinks that investors who continuously make significant investments use the angel strategy.

Not everyone should pursue angel investing. People will judge these investors as being foolish when there is a chance to make significant sums while also potentially losing money. However, the truth of angel investments is that you don’t need many individuals to agree with your strategy. This form of investing would cease to provide once-in-a-lifetime rewards if everyone were ready to invest in this manner. Millions of people are currently deciding against investing in worthless technological businesses, though. In their early stages, some well-known investors passed on some of the top companies in the world, including Airbnb and Uber. Jason contends that in this way, we create our own luck.

We must create our own luck by selecting greater assets while having little information, as opposed to merely making the right choices.

These excellent investments, as well as our subsequent luck, are not coincidental. According to Jason, picking your investments carefully will increase your chances of success. Additionally, he advises combining this strategy with surrounding oneself with prosperous individuals.

Investment Returns

Early-stage investing, in contrast to index funds, does not guarantee returns. Jason asserts that most early-stage investments will fail, as most people contend. Jason argues that you do not necessarily have to lose money if these investments fail, though. Instead, if you are investing wisely, you will at least receive a return on your investment. As a result, you greatly increase your odds of generating enormous sums of money while reducing your likelihood of losing money. This is especially true because getting involved in the world of angel investing improves your prospects of success in the future.

For instance, you will encounter more motivated and inventive people inside the industries you wish to invest in after making an angel investment. Additionally, you will increase your access to information, people, and educational opportunities.

The investor returns from angel investing, according to Jason, follow power-law distributions. In essence, the returns of all angel investors will probably be equal if the top three biggest winners are excluded from their portfolios. The power-law predicts that the majority of the return on your portfolio will come from your top one or two investments. This law emphasizes the fact that not all investments made as an angel will succeed. Your chances of finding the one or two assets that can yield sizable returns will rise as a result.

It also illustrates how success will lag and that failure is inevitable. You must therefore possess a strong will and be prepared to persevere in the face of setbacks.

Most businesses fail within the first two years of being founded. The success of the company will, however, take a lot longer to develop and offer exits. Therefore, you shouldn’t let the fact that failures exceed successes during your first few years of angel investment demotivate you.

Investor Psychology

People’s decision-making regarding investments is significantly influenced by psychology. Psychological biases can influence not only markets but also your decision to invest. For instance, confirmation bias may take control, causing you to overvalue comparable assets in the future because of a small amount of success with one investment option. Because of this confirmation bias, you might not be able to diversify your investing options and earn potentially much more money.

Writing deal memos is one strategy to combat the investment biases you are most prone to. Deal memos are used to record precise information about each investment. You should keep track of your justifications for each investment, as well as any dangers, worries, and other supporting information. These transaction memos are meant to help you make better investing decisions moving forward. Deal memos should make your short-term thinking more clear by requiring you to put it in paper. Deal memoranda also provide a considerably less biased conclusion of your investing reasoning. These memos can be reviewed in the future, whether the investment is performing well or poorly. You can then utilize these transaction notes to direct your subsequent investments.

Due Diligence and Deal Screening

Impulsive investing is never a good idea. Instead, judgements about investments should be made after some thought. Jason advises that you never say “yes” as a result. Simply responding “yes” to anything in business communicates that you made your choice without giving it any thought. You should inform founders that you need to conduct due diligence before investing in order to avoid making a mistake. In particular, you ought to consider all of your investment possibilities before choosing one.

Jason advises applying these similar guidelines to equity crowdsourcing. It is simple to listen to enthusiastic founders discuss their venture and become sure the company will be successful.

However, the decision to invest at this time is purely irrational. Instead, pause for a few days to consider the business’s possibility and contrast it with other investment opportunities. Additionally, make an effort to maintain an unbiased perspective rather than become emotionally tied to the investment.

Getting the product and performing due diligence are efficient ways to adopt an objective viewpoint. A good method to decide if this is an investment worth making is to use their product as though you were a customer. Jason advises investing based on the founder rather than their product, although doing your “hard work” by unbiasedly assessing the product is still important. You are learning more about the product than the typical investor since you are testing it.

You must weigh each possible investment against other prospects and avoid obsessing over missed opportunities. Each week, dozens of amazing discounts are offered. You only need one of these transactions to generate a sizable profit.

For consideration, a proposed investment must first satisfy two requirements. Potential investments must, in particular, be led by a fantastic entrepreneur and have innovative ideas. You should consider whether the creator wants to transform the entire world or just a certain feature or application. You should hedge your bets on the former because they have the most potential. Jason demonstrates why using either of these two methods could result in the same thing. The founders’ objective and vision, however, are more crucial to the company’s success. In essence, strong concepts can set one product apart from another.

Enterprise Scalability

Businesses are divided into two categories by Jason: scalable and non-scalable. Jason exclusively backs scalable businesses. In the field of equity crowdfunding, enterprises that are both scalable and non-scalable are common. Therefore, you must comprehend this concept in order to compare two similar businesses and decide which is more scalable.

Examples of non-scalable businesses offered by Jason Calacanis:

Independent Films
Restaurants
Bars
Bed-and-Breakfasts
Consulting Firms
Clothing Lines
Microbreweries

These companies have a great chance of success. These triumphs are rare, though. Because it takes a lot of time and money for these businesses to grow up their orders to billions of dollars, they are typically not scalable. When a startup reaches this billion-dollar mark, it is referred to as a unicorn. Early backers of Uber, which is now worth more than $1 billion, included Jason Calacanis. An organization that was obviously scalable was Uber. As a result, there was a lower likelihood of failure, less chance of dilution, and fewer things that would have affected its odds of maximizing returns.

Investments Are Never Permanent

One advantage of starting early is that you might opt to invest more money if you grow greater confidence. For instance, depending on certain factors, you can opt not to invest during the initial round of investments. You can always invest in this company in a future round of funding, though, if the company fixes the issues you point out. Make sure you understand the difference between the product and the founder. A business can seek to raise more money by switching from a product that isn’t selling well to another very easily. The founder can be changed, but it takes a lot longer and causes more harm.

Minimum Viable Products and Founders (MVPs)

Jason, as previously mentioned, gives great founders precedence above great products. Notably, he prefers to invest in entrepreneurs who act rather than just talk. Important are big ideas. This does not imply, however, that you should back someone just because they have a lot of innovative ideas. Jason advises staying away from innovators who hold off on building their idea until they have a safety net of cash or the ideal time. These founders are talkers, in Jason’s opinion. As an alternative, you ought to try to finance entrepreneurs who pursue innovative ideas. Particularly, individuals who develop minimum viable products and test numerous iterations to determine what functions and what doesn’t.

These founders will keep producing based on their innovative concepts, which will lower the likelihood of failure.

How to Invest in Angels on a Tight Budget

The fact that angel enterprises frequently demand contributions of above $10,000 is one problem for angel investors. There are alternative methods to invest in a business with great potential, though. Take into account, for instance, whether you have any expertise the firm could benefit from. By contributing expertise in marketing, coding, or design, you can help angel startups by serving as an advisor. Similar to this, if you have a network of people who can help this company, you can join its board of directors without having to invest any money. The corporation may then award you shares in the company if you choose one of these strategies. However, you should only use this strategy if you lack the capital to make an investment.

To get these shares, you will need to invest a lot of time. This kind of investment is what Jason refers to as a “Broke Angel.”

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