The Swyx Mixtape

Codie Sanchez recently appeared on the My First Million podcast and gave a really good answer to her perspective on Angel Investing.

Audio Source: https://www.listennotes.com/podcasts/my-first-million/176-with-codie-sanchez-MqNCtEfGm0y/

Why Angel Investing is Dumb

swyx: [00:00:00] I started angel investing at the end of 2020, the opportunity just presented itself. And it was such a compelling company that I just did it. and since then I've done about five deals and each of them have been about five to $10,000. So it's starting to become a significant chunk of my net worth. 

And I always knew at the back of my mind that it's not the best use of funds. Like I am a seasoned investor in the stock market. And I know that I shouldn't be speculating so much because I don't have that much of an edge, but I do have smart friends. Anyway, I think that it's worth discussing the problems with angel investing as it's starting to become more popular. And I thought that this discussion between Cody Sanchez and Shaan Puri was very intellectually honest. So here it is.  

Shaan Puri: [00:00:39] Angel investing is largely dumb. 

Codie Sanchez: [00:00:41] Is that painful? Because we both are angel investors too. And do you have a rolling fund? 

No, I actually say this often and people are like, you have a rolling fund and I'm like, yeah. Of all my investment types that I do, this is, I would say the worst one, but I think it's still good and fun.

And I do it anyways, but I have two or three better ones that I do besides this. 

One of my good friend's name is Justin Donald, and we're both pretty obsessed with deal structuring. One of the biggest things I have a problem with angel investing is it's too fun. It's like gambling, right?

Like you get excited about the founders and guess what founders are charismatic. That's how they raise millions of dollars. And so you end up getting sold and it's not their fault. And then, there's fraud. And, I wrote this whole piece about this one guy that we lost $2 million with.

Because he just the super egotistical and like big images of himself on the wall. Like all this stuff later that I got added to my due diligence questionnaire of like, how many images of yourself do you have in your office? But but the the thing with angel investing is, this, you need 20, 30, 40 deals for every 1 to 4 that are going to go through.

And so I think that the other thing that we do a disservice is telling people to invest in angel early on. Once you've made a few million dollars, and I mean that literally, then I think go into angel investing, or if you're on a path where you're making really good money and you've made at least half a million bucks, then I think you can start angel investing, but until then, let other people lose money and learn from it. 

You said it like you were like, take a DocuSign image of every deal you want to do. Write down how you do it, timestamp it so people can see and then decide later on how good you are at it. Without burning through a few tens of thousands of dollars.

Shaan Puri: [00:02:19] Yeah, exactly. Okay. So I have a bunch more thoughts there, but I largely agree with you. And I would say it's one of those here's my red flag is. In order to talk in order to justify angel investing, you have to give a blend of reasons. It's it's really fun. I like learning about the, the future and the Martin, and these are all true things by the way.

So it is fun. You do learn a shit ton. So it's like an education. You can make great money if it pans out as you assemble your basket and, you should over you should be netting, a 20% plus IRR. It just takes a long time. It's a liquid And it's not too much work because you're largely investing in your network that you've already built for 10 years.

That's the thing. And so there's like this blended reason, and anytime you have a blended reason, it just really means that there's not one really great reason to do something. And so those are always like, sub-optimal choices. I find for myself, at least whenever I have to come up with a blend.

And and I, and because I tell everybody this around me, whenever they hear me justifying something with a blended reason, they're like, Oh, interesting. So that's a pretty big blend and I'm like, Oh yeah, we should just not do it. Nevermind. Take it all back. Because I'm giving you this huge list. And instead of just saying, we should do this because of X, right?

We should invest in this business because it's growing like a weed and if it wins, it's going to be this big that I can get behind. And some angel investors do fall into that. But the act of angel investing as like a job or a hobby is Is it's more like when you describe playing basketball with your friends Oh, that's great.

I get to hang out. My friends, I get a good running. I get exercise. I, it's, I get outdoors. It's you're giving this blend of reason for doing the really fun thing you just really want to do. And you're justifying it. But the reality is you just want to do it in your brain, comes up with reasons afterwards.

Codie Sanchez: [00:03:59] That's exactly right. Yeah. The only caveat I have to that is if you can go later stage deals, which now you can do with a lot of the late stage angel list syndicates, or if you construct your debt, like if you can figure out a way where you start earning interest day one on a startup that actually has, it's a little bit later stage.

And so it has some revenues or you could. Get into a debt deal. That's on some of it's, factory and of the invoices. It has there's, people always think of equity with startups, but lots of startups prefer debt. So do debt with equity warrant kicker on it, and you can actually make money from day one and then have some equity upside.

And that I think is interesting, but, throw the Y Combinator term sheet out the window because it's not going to be on 

Shaan Puri: [00:04:39] that. And all that being said, I'm still gonna angel vest. Cause it's because it is fun. And it's, that's a hobby that makes money.