Is The End Goal Starting A Fund Of My Own?
Surely it is, right? Why else would I do it? 🤔
Original Post: efficientvc.com/not-starting-a-fund (for most updated version)
Shortly after learning more about the venture capital space and (making my first angel investment), I thought for sure that I’d want to start my own fund. I was practicing patience though. I just started my journey, so I’d have to be out of my mind to think I’ve earned the right to manage other people’s money. Patience is something that I am good at though: I am a long-term-focused person in everything I do. So all I have to do right now is focus on deriving happiness from my own angel investments.
Something strange started happening though. After making a few more investments and talking more publicly about angel investing (while continuing to learn). I started to get a lot of people asking me the following question:
When are you going to start your own fund? And when you do, can I invest?
Wait, what…? Now, we aren’t just talking about friends and family here… Let’s take the Cloudflare engineer that I met at SaaStr. We quickly became friends after a 10-minute talk about stocks, business, and angel investing. This led to us exchanging numbers and chatting more about investing. Then came coffee, and the inevitable “can I invest” question. Not but 3 months into my journey, I had nearly strangers starting to look up to me as a mentor (these are not my words - and quite frankly, I couldn’t help but feel a bit uncomfortable and confused). Let me say it again: I don’t even know if I am good at this yet.
And here comes a micro lesson that I’ve learned over the past year:
There is actually something to simply taking action. Diving into the unknown, trusting your gut, and making meaningful choices, that people find infectious.
Making Meaningful Choices #
In a world where many want to quit their job and start a business, want to angel invest, want to leave their hometown, there are only a fraction of people that will ever actually take action on these feelings.
I for one uprooted my life (leaving my family and comfort), grabbing a 1-way plane ticket with a carry-on suitcase of my belongings, heading to San Francisco, from Buffalo (NY), in hopes to surround myself with more people that I could be in awe of. This led to me meeting my wife.
“Okay, but why are you mentioning this?”
She attributed in huge part what attracted her to me was seeing that I actually took action. We met because we were both doing the difficult and uncomfortable thing of leaving our hometown. Leaving our comfortable life, our family and friends, to just dive head-first into the unknown. In hopes for nothing more than a more exciting future.
So all of this to say, I have thought a lot about starting a fund. I feel like I could actually get some level of support in starting a fund. I believe that people would want to join me on my journey. And that is fucking amazing. I feel humbled by that, but I don’t feel like I deserve that (yet). Even with the potential path to “starting a fund”, I’ve managed to distill my thoughts down to 2 core reasons…
Why I Don’t Want To Start A Fund #
1. All of the access I have gotten, (for what I believe to be my best deals), has been like pulling teeth. And at times, feeling like I am cashing in all of my chips to “get access”.
My friends - we are talking about sometimes having to nearly beg to get even $10k of allocation. No chance at any more than that.
Yeah, the hot deals don’t only have minimums, they also have maximums.
I’m sorry, but we only have $300k of allocation left, and $250k is reserved for pro-rata rights (follow-on investment from the large VC’s and sometimes funds), so that leaves $50k for our angels, of which we can allocate you $10k.
What the hell? You have to fight to give companies money? In the good companies, yes. What value do you provide? Why should I give you more allocation? How can you help us strategically get to our next milestone/raise?
There’s a lot of money out there. You’re not special. I know, it’s a bummer.
So take my first investment in Motion - I didn’t just get to ask for a $35k allocation. I had to plead my case for it, showing them why they would benefit in some way from having me on their cap table.
Now say that I had a fund, I would have to request more like a $150-300k allocation, and then comes: “sorry, but we’re not raising right now, and we already have a ton of interest from more strategic VC funds, that will help us with hiring and strategic business intros, etc.”
Sometimes the good companies can make room for an angel if you show your value, rarely do they allow you to syndicate the deal.
The team at Motion only let me put in (yet alone when they weren’t raising), because they said I was “their top user” and had given so much helpful product feedback, that they were excited to have me more involved. Yep, their top user at the time, and that probably wouldn’t get me more than $30-50k of allocation.
So Alex’s fund doesn’t get the same deals and access as Alex the Angel does. That has been something made very much clear over the past year. Because of that, funds actually don’t always get the best deals, unless you’re really important and offering a ton of value.
2. Even if I did have a fund, most of my interested network isn’t even accredited, so I’d have to spend more time advertising the fund, and it’d be a full-time job. I don’t want to do that, I don’t even know if I’m good yet. That’s the problem with venture capital, I won’t truly know how good I am for 7-10 years. And just because I got lucky scrolling through Instagram in the wee hours of the night and stumbling upon a kick-ass startup, doesn’t mean that I am good at managing other people’s money. I am good at taking risks with my own money, but it’s also because I don’t care if I lose all of my money taking risks. I can’t say the same about a family member or friend’s money. That shit is different.
Actually, to be fair, I guess I do, in a way, have a fund. It’s a personal fund, and my wife is a Limited Partner (LP). She gets in on some of the deals (I almost always give her the opportunity, given there’s enough allocation available). She joins in about 30-40% of the time 😬
Now with other people’s money, it becomes a job. Worst part of it all is that you don’t get to control how others react or feel. Believe me, I’m good at losing money (Okay wait… I’m saying that I deal with losing money in a healthy way, I don’t sit here and pride myself on losing money…).
To drill the point in a bit, I’ve lost 6-figures playing around in crypto (when my net worth was 6-figures)
The magic here is that this has allowed me to punch way above my weight class. You shouldn’t lose 6-figures until your net worth is in the 7-figure range. Being down those percentages really mentally prepares you for the gamble that is angel investing.
And no (because I’d totally be wondering) - most of my net worth has not come from Crypto, though I did get obsessed with Ethereum back in 2017 and I’m damn proud of that. That said, most of my net worth (talking 85%) has come from grinding it out in my business for over a decade. Good-ol income-coming in.
All-in-all, the market is so frothy right now (or at least was up until a couple months back), that everyone thinks they can start their own fund. The truth of the matter is 90% of people wouldn’t even beat the average returns of the S&P500 with their fund ($QQQ/$SPY). Not to account for the added illiquidity risk that comes with angel investing (money locked up for 7-10+ years). So do I think I’m talented enough to do that for other people? I don’t know, but probably not based on statistics. My focus is just to invest in cool tech that I believe in because it’s enjoyable for me. That’s not the goal of a fund.
Until next time!
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