unexpectedly became a 1-man VC. Now what do I do?

So I got a weird first-world problem here. I've unexpectedly become an angel investor, with a significant pool of capital to deploy, as an individual. 

Over the past 15 years I had been helping a friend who is an serial angel investor out. Mostly I helped connect his companies to capital sources, helped them fix up their pitch decks, etc.  Fast forward to today, and my angel friend has become VERY wealthy. Now he said I can invest on his behalf, and in essence run my own fund, and he'll stake me. He earmarked $10M for me to invest, and I get a % of the returns. It's basically carried interest, but no management fee.  It's a great opportunity, but I don't really know how to be a VC. I'm a growth equity guy by background, and am used to being part of a platform - with deals rolling in, working with a team, etc. 
The problem is that I'm inexperienced in investing in early stage deals, and I don't have an early-stage deal network. I have started to invest, and for sure I'm not letting this opportunity get away. But my question to you guys is: 
- how can I learn to invest in early stage deals?
- how do I build up a deal network (I'm based in HK but deals are prob better in US/Israel)?
- how can I run this 'pocket VC' entity without budget to hire people?

First world problems for sure. We've invested first into some foodtech and crypto-equity deals that I've had access to. But now I need to start finding mentors, systematizing this investment program, etc.

Comments (28)

Most Helpful
Dec 15, 2021 - 2:50am
anon45523, what's your opinion? Comment below:

Hire me as an intern?

Only slightly joking! To not be completely useless, I can try provide some thoughts as someone who's been involved in my local early-stage company ecosystem / working on advising growth stage companies in getting funding:

  • Having boots on the ground in the geography you want to invest in is probably crucial; while all start-ups / VC funds are pushing remote work, I think you won't get the same "pulse" of the ecosystem unless you're interacting in person
  • Would say it couldn't hurt to replicate a similar strategy to your angel backer; they've clearly achieved success and if there was any structured approach used, try mimic that as a starting point?
  • First actionable thing I would personally do is establish a good CRM-type system; build up lists of (1) prospective start-ups and (2) other VC funds, as you build your network as someone with money to deploy, hitting it off with other funds could be one way to increase your deal flow. Also the benefit is that you can incrementally build up your rolodex and have it very clearly mapped out for you (there are some pretty good CRMs focused on sourcing-heavy shops, i'll follow up w/ names if I can remember)
  • Aware you noted you're in HK but I'll comment from my geography anyway (Australia); VC funds here are very much for transparency. Blackbird, for example, is disclosing all of its fund data. A great way to get a feel for what's hot in the market is just looking at VC portcos and finding ancillary industries that are underserved. On the same point of transparency, check out AirTree's Open Source VC page - they have a lot of resources wrt start-up documents, investor lists and so on. While it may not be directly relevant, there could be things in there that help you flesh out the operations side of your fund (e.g., term sheet templates, diligence checklists, investor lists)
  • Regardless of how you plan to invest, would really focus on getting involved in all the accelerators / events / angel networks etc. in the sector/geography you're trying to be involved in; it helps you build credibility and a track record without deploying capital as you start out

Apologies if a lot of this is already common sense - just stuff I've taken from being involved in the space

Dec 15, 2021 - 10:37am
acardboardmonkey, what's your opinion? Comment below:

Man that's going to be hard. Aside from not having VC experience, and having done growth equity myself as well it is super different, it's hard to evaluate this stuff abroad. You have to understand how little these companies will have for you to DD. I'm talking having to ask them to build you a cap table, or having random high interest loans from mom and dad on the balance sheet. Your friend clearly has done well, ask them more what they want for a sector focus / geo? Alternatively, you could cut a cheque for 2-3M with a fund and work on co-invests. That way you have another set of eyes you aren't directly paying for, deal sourcing, and to be honest these firms will be more competitive in the deal process than random guy with 10M - unless your friend can be a value add. You've got a cool opportunity, but good deals are really competitive these days

Dec 15, 2021 - 3:31pm
earthwalker7, what's your opinion? Comment below:

yes exactly. We've paid co-invest fees to get into 2 deals. But that's a heavy price to pay (10% and 20% carried interest) to get into deals, and leaves nothing for me in the deal at that point. So you're right on all counts - it's difficult, good deals are competitive, co-invest is possible but pricey.

  • Associate 3 in IB-M&A
Dec 15, 2021 - 11:16am

I don't have any VC-specific advice here, but make sure to hammer down details with your friend in a clear written contract. Even if it's worked out until now, this new arrangement has strong potential to go south.

Dec 15, 2021 - 4:52pm
Fill-or-kill, what's your opinion? Comment below:
  • Network with other angel investors in SF, SV, NYC, Miami, and Austin if you're based in the US
  • Attempt to build relationships with "old school" nexus-VC's, such as Pejman Nozad. These are non-traditional, successful, Angel/VCs. To open doors, ask them for advice and visit them bearing gifts like a fancy cupcake or other sentimental token of appreciation and respect.
  • Make friends with smart college kids by:
    • Offering internships to target school kids
    • Hosting small-stakes competitions like a $5k check for a start up concept
    • Maintain the network by throwing periodic parties and inviting people
  • Start a website/blog where you post 1x month about companies or something new you are doing or seeing, to position yourself as a differentiated thought-leader

Good luck!

  • Associate 2 in PE - Other
Dec 16, 2021 - 9:54am

I am confused by the part where your friend is a super successful angel investor and now wants to give you $...to do the same thing as him? I may be a little confused. In one sentence you say both invest on his behalf and run your own fund...but this is only a partial allocation of his total capital? So he is going to continue his own angel investing? Why not have him take a step back from the day to day and just feed you stuff he sources and you run the process in exchange for some carried interest? Or is the idea that in addition to throwing you stuff to chase down from time to time you'll mainly have the freedom to pursue your own strategy? Not sure why, if he's going to continue his own thing, he'd throw good deals to you where he stands to personally earn worse economics. 

Dec 17, 2021 - 2:11am
earthwalker7, what's your opinion? Comment below:

I think he is doing this for 3 reasons:

  • He continues to invest actively but he's also taking a part of his money and giving it to other investors like myself and investing through us.
  • Maybe it's because it allows him to scale up and leverage the time of others.  And maybe he wants to get his money spread out to areas in which he lacks expertise, and to tap networks he does not have. For example, in my case, by investing thru me he gets access to synthetic biology and access to the accelerator deals I'm a part of.
  • He has some health issues. He's not able to run around and deal at the same pace like he used to. 

But yeah, it's a unique situation. Clearly he's more skilled at this than I am. So having me do it for him is a bit unusual.

Dec 16, 2021 - 12:54pm
dedline, what's your opinion? Comment below:

earthwalker7 good to see you back around and glad to hear you're doing well.

https://ctan.com/

Networks of angels that invest as a platform.
 

Why not join a few of the largest regional ones, sit-back, and evaluate deal flow that comes through on a quarterly-basis? That's probably what I'd do if someone gave me $10M to deploy.

Dec 17, 2021 - 2:28am
earthwalker7, what's your opinion? Comment below:

I have set up a small side vehicle with his money and mine to do just that, and take tiny LP positions into some small high-returning VCs. But I won't get paid any carry on those deals.  I get a carried interest of x%, less all expenses and fees, where X is less than 20%.  If we invest in funds that charge 2/20, then I'll get $0 back from it, because 20% > X%. 

Dec 16, 2021 - 2:00pm
Deo et Patriae, what's your opinion? Comment below:

earthwalker7

So I got a weird first-world problem here. I've unexpectedly become an angel investor, with a significant pool of capital to deploy, as an individual. 

Over the past 15 years I had been helping a friend who is an serial angel investor out. Mostly I helped connect his companies to capital sources, helped them fix up their pitch decks, etc.  Fast forward to today, and my angel friend has become VERY wealthy. Now he said I can invest on his behalf, and in essence run my own fund, and he'll stake me. He earmarked $10M for me to invest, and I get a % of the returns. It's basically carried interest, but no management fee.  It's a great opportunity, but I don't really know how to be a VC. I'm a growth equity guy by background, and am used to being part of a platform - with deals rolling in, working with a team, etc. 
The problem is that I'm inexperienced in investing in early stage deals, and I don't have an early-stage deal network. I have started to invest, and for sure I'm not letting this opportunity get away. But my question to you guys is: 
- how can I learn to invest in early stage deals?
- how do I build up a deal network (I'm based in HK but deals are prob better in US/Israel)?
- how can I run this 'pocket VC' entity without budget to hire people?

First world problems for sure. We've invested first into some foodtech and crypto-equity deals that I've had access to. But now I need to start finding mentors, systematizing this investment program, etc.

There are essentially two things you must learn about early stage investing if you are to be successful at it, 1) all your returns will be concentrated in one, maybe two big winners that render the 3x or even 5x returns in your portfolio to be rounding errors, 2) the big winners initially look like dumb or bad ideas (Uber, Airbnb, etc.)

In a talk Peter Thiel once drew a Venn diagram that had two intersecting circles, with one circle being "seems like a bad idea" and the other circle being "is a good idea." To get the big winners, you have to find the intersection between the two circles... (easier said than done)

I've done about 25 angel investments and plan to do more in the future. I focus mainly on mid-to-late seed stage companies with early evidence of product-market fit or post-product market fit (but prior to growth inflection). I will also occasionally invest in a company's series A round. Geography agnostic, but the vast majority of my investments have been US-based companies, followed by Asia (especially India) being the second largest category, and EU rounding out the rest.

No exits yet in my portfolio, but some of my earliest investments have gone on to raise further financing at pretty nice valuations including a company which I talked about in this post here (the company went on to raise a big Series A from a Sequoia-tier VC)

In terms of my deal network, I've been lucky to be in a few private slack channels dedicated to startup investing in which members share their deals (typically a company that they have already invested in, and looking to find more investors to fill out the round). Some of the members in these slack channels are pretty famous investors such as Garry Tan of Initialized Capital, or his ex-partner Alex Ohanian (now doing his own fund Seven Seven Six), just to name a few. Membership to these slack channels is unfortunately restricted, but I am free to selectively (i.e. no email blasts) share deals that are posted in there. I'm also an LP in a few funds, which occasionally leads to some co-investment opportunities, and sometimes (on a case-by-case) I am allowed to share those outside the network.

Anyways, let me know if you want to discuss offline. I'm on US eastern time.

Dec 16, 2021 - 4:22pm
Deo et Patriae, what's your opinion? Comment below:

What's the minimum investment for seed / series A rounds?

In my experience, $25k seems to be the agreed upon minimum investment amount that most founders are willing to accept at seed and even Series A, but it could be much lower than that if you personally know the founder. I've seen deal docs circulated by lawyers that had some very small ($5k or even less) amounts on the cap table (usually a family member or an old friend of the founder/CEO)

  • Analyst 1 in VC
Dec 17, 2021 - 7:42am

Why don't you try to learn as much as possible from him? He is successful and trusts you enough to give you $10m - I'm sure he would be willing to teach you how to invest at the angel stage and you would probably learn a lot of useful stuff from him.

You could go local but so many deals happen over zoom now due to the pandemic. If I was in your position, I would try to sign up to all the major accelerators around the world and meet as many founders who are going through them as possible. Good deal flow is really important - super important. 

Dec 17, 2021 - 8:38pm
Non-NFT Monke, what's your opinion? Comment below:

I don't know why no one is stating the obvious here.

Your friend is literally an angel investor (one that made a lot of money).

You should just ask him as he's literally an experienced person and will absolutely not hesitate to help you out of all people.

Dec 19, 2021 - 6:14pm
earthwalker7, what's your opinion? Comment below:

Yes I'm definitely speaking with him about it. But please keep in mind he was an uber successful China angel. He has not been investing internationally. And he's VERY busy as he's still doing China deals. So he gives me some general advice but I have to figure a lot of stuff out myself. For instance he's really pushed me to focus on synthetic biology as it's not yet been as competed over as other tech subsectors. Many VCs haven't yet discovered this area, and it's also an area in which I have deal access and some expertise. But outside of synthetic biology I'm not sure if/whether I should invest and how.

  • Analyst 1 in IB - Cov
Dec 18, 2021 - 12:10pm

I feel like they key to early stage is having the connections to 1) get into competitive rounds, and 2) get into a cap table before rounds become competitive. Pro rata and repeat

  • Analyst 1 in IB - Cov
Dec 19, 2021 - 6:56pm

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