How Much Angel Investing is Too Much for Founders?

As Cloud market caps and valuations have exploded, so too have the ranks of CEOs and founders becoming angel investors.  This is nothing new.  The founders of Stripe, Datadog, Box, and more are all small investors on the cap tables of many of my top investments, and they’ve done just fine!  And these days, if you are able to raise, say, a Series B round, often as part of that, you’ll be able to get some “secondary liquidity”, i.e. be able to sell a small portion of your shares.  Many founders want to turn around and invest some of those proceeds into other startups. (more on secondary liquidity here)

And as a CEO, doing some angel investments can be a great and efficient way to give you insights into how the next generation is doing.  CEO is a lonely job and actually making a handful of angel investments in outstanding founders can be one way to make it less lonely and more connected, at least a little bit.

And yet … at the same time, any significant amount of time spent investing is distracting.  At least, too much of it.  CEOs you invest in want your time, and advice, which is great.  And these days, more and more founders are actually raising small and even not-so-small VC funds themselves.  This takes more and more time.  It’s distracting.  And if as CEO if you invest a lot of capital, the overhead it takes to professionally manage money is real, especially the more traditional your LP base.

And more than that, I worry a bit.  I worry a bit when I see founders investing too much.  Why?  It sends a few signals not just to me, not just to VCs, but also I think, more importantly, to employees and more:

• Some founders think investing is easier than being a founder.  And you know what?  They’re right.  It surely is.  So much easier.  But you don’t want the team thinking you are looking at the green grass.
• Your Founders Stock should be your best investment.  Time will tell, but even having invested now in 5 unicorns and decacorns myself, I’ve still made more money off my founder’s stock than anything else.  If you really go for it as a founder, you should make a lot more money off your 5%, 10%, 20%, or whatever of your own startup than some tiny slice of someone else’s.  For sure this won’t be true if you never have an exit, and may not be true if you have a modest exit.  But if you only believe in your heart you’ll have a modest exit, why will most startup folks work for you?
• Diversification makes sense, but maybe not really.  Many founders say they want to invest in other startups to diversify risk.  In theory, I get it.  But in practice, that’s not how you build a unicorn.  You build a unicorn by obsessing about building one amazing company and doing everything possible to make it so.

Some folks will challenge this, and to be clear, I think a certain amount of angel investing for founders is a good idea if you want to do it.  Similarly, I think joining one other board of directors is a good idea, too.  Both keep you fresh, and make your perspectives less insular.

But there’s a line.  A line that says you don’t really think your founders’ stock is your #1 best investment anymore.  Cross that line, and others will sense it.  And some just won’t believe as much anymore that you are really in it to go big.

Source: https://www.saastr.com/how-much-angel-investing-is-too-much-for-founders/