The 11 Lessons Dharmesh Shah Learned From 80+ Angel Investments

~13 Years, $3M+ invested, and 80+ investments later, I compiled the 11 investment lessons that I wish I would’ve known when I first started angel investing.

April 21, 2021

As an early investor in Coinbase, and their IPO last week, Dharmesh (Co-Founder of HubSpot) tallied another win in his book. But this was only one investment out of eighty he’s done. Luckily, he shared with me (Alex Garcia) the top 11 lessons he’s learned over the last 13 years. These are his top takeaways.

Oddly enough, my indirect start to angel investing started at the ripe old age of 24. I just didn’t know it yet. I was 24, ready to take on the startup world when I launched Pyramid Digital Solutions, a CRM in the financial services vertical.

I bootstrapped it for 10 years.

On year 10, I sold it to SunGard Data Systems, a large tech company. And at 34, for the first time, I had some liquidity (a fancy word for real money you can actually use). 

How much?

Not enough to buy an entire island in Hawaii (which would have been weird anyway — I’ve never been to Hawaii), but enough to never have to work again. And especially enough to not have to work startup hours again. 

I told my wife it was time. Time to hang up the entrepreneurial hat and continue onto bigger and better things. You know, just like I had been promising her I’d do for years.

I took my next step and enrolled in graduate school at MIT. My goal was to pour myself into graduate school and enjoy it.

I always liked school, but I had to work full-time all the way through undergrad (took me 7 years to get a “4 year degree”), so never really got a chance to enjoy it.

But the startup itch started creeping back in.

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I missed startups. But this time, I wanted things to be different.

So, I thought: Why not invest in startups?

If I invest in startups then I get to work and brainstorm with founders (awesome), and then let them run off and build it while I go enjoy my life (awesome).

10 minutes of research later I found out that I was a legit accredited investor. Turns out all one needs to be a legit accredited investor is tolerance for risk (money) and I had that. I think the minimum back then was $2 million. 

It was time to start writing those checks.

But where, how, and who do I write these checks to?

During my first year in grad school, I enrolled in a class called “New Enterprises.” Its focus was on understanding entrepreneurship. They even made us each pitch a startup the first week of class. Then, we all chose which startup teams we wanted to be a part of.

I pitched a startup called “HubSpot.” Yep, what is now a publicly-traded company with a market cap of over $20 billion started as a student pitch in an MIT classroom.

Turns out, my classmates liked the idea, and HubSpot was one of the ideas that teams formed around.

The other two ideas?

Visible Measures (application analytics software) and PawSpot (a social networking site for pet owners).

I respected both the people behind those ideas, Brian Shin and Mark Roberge, so much, that I decided to make an angel investment in both of their startups. 

Now, I was officially an angel investor

Being an angel investor was easy! You didn’t have to actually know anything. You just had to write checks. Easy, breezy.

Two years later, I made what turned out to be my most impactful investment. I invested in myself. I wrote a $500,000 seed round check to HubSpot on graduation day.

That’s an entire story in itself.

But ~13 years, $3M+ invested, and 80+ investments later, I compiled the 11 investment lessons that I wish I would’ve known when I first started.

Important Note: There’s no one “right” way to angel invest. A lot depends on what your goals and motivations are.

Here’s why I got into it (in descending order):

  1. I enjoy the intellectual challenge and learning
  2. Bragging rights (”I knew them when”)
  3. Make some financial return

The lessons beloware geared around the “investor” part of being an angel investor. That is, if you’re looking to make a healthy return on your investment.

Lesson #1: Not all investments will be 20x+ hits, but some should be

Your returns will come from a small percentage of companies creating really large (20x+) returns — not by trying to make 2x returns on a majority of them.

The math just won’t work that way.

Venture capitalists know this well. Your returns come from the big hits not from a bunch of smaller hits. If you invest in companies that all have a high probability of at least a modest you’re not going to make enough return to have warranted the risk.

Given the above reality, most (if not all) of your investments should have an opportunity for outsized return.  If you “hedge” and pick companies that have a chance for 2x-5x — but a low probability of failure (i.e. you get your money back), you will not succeed as an angel investor.

So the key to really winning this is having at least a couple of those high fliers in your portfolio — let’s say 1 out of 10.

The way to maximize your chances of this happening is to make sure that all or most are at least trying to create that kind of company.

Nothing wrong with those entrepreneurs that are not trying to create those kinds of companies — but that’s what you should mostly be betting on (unless of course, you’re seeking something other than financial return).  

So, plan for 9 out of 10 not being big hits, but the ones that do will make up for the rest.

Lesson #2: Picking potential winners are only half the problem

Identifying the potential winners is only part of the problem. A hard one at that. 

The rest of the problem is being able to invest in the companies that you think are potential rocket ships. Often, these deals will be competitive. Plus, these days, there is early-stage VC in the mix too.

To stand out, you have to have some credible story as to why they should take your money vs. all the other money they have access to. The story will vary, but there needs to be one.

Here’s my story: I’m extremely low maintenance and always side with the founders…always. I will not get in the way. I have a relatively strong online following, which I can use to gently at least talk about the company, amplify company announcements, help with Product Hunt, etc.

Related tip: One way to increase your odds of getting into a deal is to use the product (if you can).  As a paying customer. Respond to the founder’s request for feedback (the best ones always ask their customers how things are going). 

Lesson #3: Check Size

When I started, my check size was either $25k or $50k (I increased those in later years) based on what I thought of the company. 

Let’s call these L1 (lower level) and L2 (higher level) investments. The amounts are not important for this particular insight.

I quickly learned most of my big outcomes came from the L2 investments.

The lesson here is somewhat subtle. If my brain is telling me to make an L1 investment, it means I’m not sure of the deal and I’m trying to minimize my losses and hedge my bets.

Sometimes these work out but usually, the ones I’m excited enough to make the L2 investment in are the ones that work out. Your gut is your best friend.

When you start angel investing, you will be presented with opportunities to invest in startups of family or close friends. You may feel a “tug” of obligation (or guilt). 

That’s OK.

It’s up to you personally as to whether you want to support those folks. But, the L1 or L2 rule still applies.

If you invest, but you’re trying to go in for the lowest number you can (L1 or below), it’s a signal that you’re not a believer yet. That’s OK, but it’s better to go in with your eyes open.

Lesson #4: Too little or too much is sub-optimal

A mistake too many angels make is that they do just a handful of deals ever — and that’s it. 

That’s not optimal. 

You need a big enough portfolio of investments that you believe could be breakthroughs to have a chance at a break-out return on one or more of them. 

Let’s say ~20 deals or so.

On the other hand, doing too many deals too fast is suboptimal.

First off, you want some of the data from your early investments to be “training data” for your selection algorithm.

You’re not going to get conclusive data for some time (i.e. exits) — but you will get a sense for whether the companies you’re picking have:

a) great founding teams

b) can keep driving growth

c) treat their investors respectfully

d) can overcome inevitable bumps in the road

For example, I’ve talked to new angel investors who say they’re going to do 30 deals a year or so, that’s too much — especially early on. You should start slowly, learn and then scale up.

Lesson #5: Bigger Checks — Less Competition

Although the valuation does not vary based on check-size, your outcomes do.

Here’s something I learned: The “better” companies (better because founders have done it before, idea is compelling enough that they have lots of interest, they went to Y Combinator, etc.) will be able to choose their investors.  Especially if they’re including angels. And, they have all learned that cleaner cap tables (that’s basically a spreadsheet that shows who owns how many shares) with fewer investors are better.

It’s better to have 5-10 angels than 50. There’s less cat herding to do.

How do you work around this?

If you try to invest anything less than $25,000 you have adverse selection starting to kick in. It’s simple. There’s a higher volume of people that are willing to write $10k-$15k checks — so, more competition.

If you take your check-size to $50k-$200k, you will get into more deals, and those deals will, on average, be better. Of course, you need to balance the larger check size with the fact you need a decent-sized portfolio. This is probably why you should have at least a million dollars or so in “investable” (i.e. losable) assets. If you do 20 deals at $50,000 a piece, that’s $1M.

Lesson #6: Success begets success

Like other areas of life/business: Success begets success.

Once you have a handful of these high-flying companies in your portfolio, it’s easier to get more.

When you’ve made 5, 10, 20 investments, you develop a bit of a “track record”.

You’ve demonstrated that you’re not just a noob. That you’re not  going to fret over every bump in the road and call the founders when growth flattens or they’re struggling.  (In all my years of investing, I have never once called a founder because I was concerned about the business going south).

Lesson #7: Speed is a feature

Part of my “brand” as an angel investor is that I make quick (usually < 24 hours) decisions.

Founders LOVE that.

Especially if you lead with:  “I’ve been a founder myself and I don’t want to waste your time — you’ve got better things to do than waste time waiting on me.”

Fun fact: If I were to ever start an “official” early-stage venture firm (which I decidedly do not plan to do), I’d call it Speed Round. Also, I own (you know, just in case).

Lesson #8: Don’t let your excitement cloud your commitment

There might be cases where you’re going to be more involved (because you’re passionate about the idea, love the founders, etc.).

That’s OK.

But, you should limit these and not spread yourself too thin. It’s easy to say “yes” early on — but remember, you’re going to be in these deals for 5-10 years.

Lesson #9: Where are you going to invest?

You’ll need to make a decision as to whether you confine yourself to your local region/country or whether you’ll invest elsewhere.

It’s partly a personal decision and what I’m about to say is controversial:  I think there is massive opportunity globally — I think great companies are being built everywhere. But, as a solo investor, I know that making investments in countries outside the U.S. is a Pain In The Ass from a paperwork and bureaucracy perspective.

It’s one thing the U.S. got right — starting companies and making investments is relatively easy here. It’s one reason why many savvy startups have at least a tiny presence in the U.S.

Lesson #10: Outsource the time suckers

The work involved in being an investor is marginal (and at your discretion), but remember that it’s cumulative. As you get to 10, 20, 30+ investments, many will start having follow-on rounds, wind-downs, and other things that need to be addressed and paperwork to be signed.

These can add up. At some point, you’ll likely need somebody to help with just the paperwork and wires and such.

If I had to do it over again, I’d have outsourced that stuff sooner.

Lesson #11: Side with the founder(s)

Don’t get into the habit of negotiating valuation and terms and such. It’s unpleasant and it’s nicer to always be on the side of the founder.

In the grand scheme of things it’s not worth negotiating.

Here’s why:  The outcome for most companies will be bimodal.  Many will simply fail and you will lose your money.

That’s alright, it’s part of the game.

Those that succeed will (hopefully) be BIG hits and whether you were able to negotiate the valuation down 25% isn’t going to mean all that much. But it *will* impact the speed and quality of your deals.

Be known as being founder-friendly — it pays higher dividends than trying to decide on what a “fair” deal is.

AND one last thing since we’re talking deal terms.

A lot of deals you do will end up being convertible notes and SAFE docs (made popular by YC). They’ll often have high valuation caps — or sometimes no cap at all. Generally, this is not investor-friendly, but it’s life in the big city. Don’t sweat it.

That’s it. Most important of all, have fun! Actually, that’s not the most important thing of all. The most important thing is to stay solvent and don’t invest more than you can afford to lose. Remember, angel investing is a long game, so even when you have winners, it’ll be 5-10 years before you see the outcome in your bank account.

Best wishes!


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