To Angel or LP: Investing Guide for New Tech Millionaires

Facebook’s S-1 caps an amazing last few quarters of tech wealth creation with LinkedIn, Zynga, Groupon and Pandora going public and small/medium acquisitions continuing to occur at a healthy pace. Many of these new millionaire employees will likely become angel investor hobbyists, using their wealth to kickstart the next generation of startups.

It’s a reasonable hypothesis – I certainly saw this happen at Google and personally have made small investments in a handful of ventures, mostly ones founded by friends. But my advice to the fortunate would be to consider becoming LPs in the top early stage venture funds, which can often outperform from both a financial and market intelligence standpoint. [I’m a very small LP in two early stage funds which allowed me to invest below their usual minimums since I’m not quite a Zuck 🙂 ]

While angel investing is currently glam with a low bar to entry, you need to be prepared for the following realities:
  • Large portfolio is required to spread out risk (mitigated only by your own investment picking skill and access to dealflow)
  • You’ll get heavily diluted if the company isn’t only up and to the right. As a small early investor you will be most impacted by flat rounds or other steps a company takes as it grows.
  • You likely won’t follow on in future rounds meaning that you can’t double down on winners
Investing as an LP in early stage funds give you more protection and allow you to treat this as an asset class instead of “fun money.”

Being in the right funds also gives you incredible market intelligence via your investor reports. I’m able to see the real numbers behind acquisitions, writedowns, valuations on new rounds (as multiple previous rounds, not necessarily total company valuation). It’s really a birds-eye view of the sector and valuable in its own right. Plus you get access to the portfolio for purposes of your own relationships and conversations – whether you want to offer help or any other business need. 

So all you new millionaires, start cozying up to not just founders but the investors you respect the most. See if they’ll take your checks too. It’s not quite as easy as angellist but it’s a great opportunity to invest back into the community.