The best angel investors in the history of Silicon Valley have usually had a really unscientific approach to investing:
Spray and pray.
The odds are so low that they’ll get into the next Google or Facebook that they just place those bets as widely as possible and… pray.
But a new generation of angels has found a cheaper, more efficient way to spray and pray: putting half of their angel funds into a Micro LP allocation instead.
Joe Harkins broke this down at a recent VC Lab event:
“It’s not so much mathematical as it is strategic. You can bet on one company and one founder, or you can bet on a fund with a fund manager that will hopefully have great deal flow and vet hundreds of companies, if not thousands, and ultimately bet on, say, 20 or 30 of those. So you can either have exposure for the same check size in one company or 20 to 30. So, which would you pick on just that criterion alone? You would pick the one that’s 20 or 30 bets, right?”
Here’s the kicker: The strategy has made Joe both more diversified across way more opportunities more efficiently, and it’s made him a better angel investor.
How?
Some LPs say they become better angel investors because they leverage the VCs they invest in for deal flow and double down when they find a good company. But that’s not what Joe meant.
Here’s what he meant instead: There is a way higher bar for a founder to get him to say yes if he’s going to write an angel check. Because the founder isn’t competing with another angel deal. They are competing with a fund manager who could get him access to all that deal flow, to kicking the tires on 1,000 potential deals, and to being in the best 20 or 30 deals he or she can find.
“Because you can write smaller checks as an LP and it’s almost equal to what you would do as an angel investor, you have to modify your criteria for these founders,” he says. “You can say, ‘Well, I don’t have to write this check. I could just write a check to a fund manager. And they might make 25 really bad bets, and then make five great ones. And those five great ones might be better than this one bet. So, you know, maybe that’s a better play.’ Now they have to get over that hurdle. They’re going to have to pitch something really strong. When that happens, there is momentum you can feel from them, like somehow they were chosen for this time and place to run this particular company. And those are the companies that you scramble to write a check for.”
It’s a completely new way to invest as an individual.
You depend on small VCs with differentiated deal flow for a much smarter, more efficient outsourced “spray and pray” diversification to the asset class, and save your angel checks for the companies that give you goose bumps.