Catfather Of The Internet: Just Because You Can Angel Invest Doesn't Mean You Should

Photo: Jon Snyder / WIRED

For the first time ever, people can now buy equity, not just products, through startup crowdfunding sites like AngelList. Some in the VC industry have commented that this democratization “changes everything” â€" especially early-stage investments, in “unanticipated ways.”

But no one’s talking about whether people should invest.

Just because anyone (well, an accredited anyone) can become an investor doesn’t mean they should. And despite what Silicon Valley folklore tells us, entrepreneurs don’t necessarily make the best investors.

I’m speaking from experience.

Ben Huh

Since first acquiring I Can Has Cheezburger? six years ago, Ben Huh has grown the Cheezburger media network to include more than 50 online humor sites that generate more than 400 million pageviews a month. The company has also released two New York Times bestsellers, and was the focus of the LOLwork reality TV show (2012) that aired on Bravo. Huh, who graduated from Northwestern University’s Medill School of Journalism, is also a co-founder and board member of mobile news startup Circa.

I’m an entrepreneur. I’m also a lifelong student of that job, which is being the CEO of Cheezburger â€" the network including sites like I Can Has Cheezburger, FAIL Blog, Know Your Meme, and more (part of what WIRED referred to as the “online cat-industrial complex”). As exciting as that sounds though, my responsibilities are actually very straightforward, even though I experiment with different things to become better at my job…

But being an angel investor does not help me become a better CEO. Sure, we all know of many startup CEOs who have made fortunes as angel investors. I just can’t tell if it’s because they’re good at it, or if a booming industry tide is floating all boats.

Now, I’m not advocating a “leave it to the professionals” take on angel investing (even serious angel investors get terrible returns they don’t talk about). What I’m saying is that being an entrepreneur does not necessarily lead to better angel investing.

Most entrepreneurs, including myself, are simply too busy running a business. Some, like HubSpot’s Dharmesh Shah, have even defined their entire angel investing strategy solely around the constraint of having no time, which results in rules such as not doing: due diligence (“seriously, almost none”); follow-on investments (because it creates a “signaling” problem for the entrepreneur); and board/advisory positions (no time).

So while I have made two angel investments in the past five years, I actually have no idea how the investments are performing. The companies are still going strong, but the investments? No clue. Note, a good company does not always a good investment make.

Why do entrepreneurs like myself shortchange the time they spend guarding their hard-earned dollars? Because the potential gain from building a great business for yourself is much higher than the potential gain from an angel investment.

This doesn’t mean I don’t want to angel invest. I’m especially tempted to do so whenever I hear about a new product or service my friends are using, and when that startup raises a VC round I kick myself for not chasing down the opportunity. (It pains me to say this, but one of those opportunities was Pinterest.)

But like most people, I have selective memory. I can vividly recall the ones that got away â€" not the ones that faded into the deadpool. Until I can be more objective about my investing patterns, I’ll lack the discipline and perspective that makes up proper financial stewardship. And in the world of startup investing, limited information and lack of transparency creates huge risks and unfair advantages â€" advantages that are hard to get as a busy entrepreneur in Seattle who relies on serendipity to review investment opportunities.

If you were buying a house and were not allowed to look inside â€" but other people were â€" would it feel fair bidding against them?

So I gave up angel investing by myself, and focused instead on backing great investors, by putting my angel funds in programs like Founders Co-op (run by excellent, passionate entrepreneur-turned-investors in Seattle) and 500 Startups (an f-bomb loving accelerator program in Silicon Valley). Now that’s diversification. And with the recently launched AngelList syndicates, which allows lead investors to open up their opportunities to other investors and multiply the amount in each investment, I have another platform to back investors if not investments.

The biggest obstacle for most would-be angel investors is their lack of information on the companies they are investing in. If information and transparency levels the playing field, then the reverse is also true: those who have information or access have an unfair advantage. Startups rarely have the resources to handle lots of investor questions, or make sure that every investor understands the risks and opportunities of each investment. After all, private companies are called “private” because company information is private and they have no obligation to give you that information â€" a public company is called a “public” company because of their obligation to disclose their information publicly.

No matter how democratized angel investing seems, it’s actually a data-starved market where relationships (and/or specific domain knowledge) can mean the difference between investing in a good company … or a terrible one. Think about it this way: If you were buying a house and were not allowed to look inside â€" but other people were â€" would it feel fair bidding against them?

I’m not arguing for more forced transparency. Regulations on how a startup shares information can create huge costs, legal obstacles, and resource overhead for startups that make patent trolls look like teddy bears.

Syndication, however, helps reduce the risks of asymmetrical information in the system. It allows amateur angels like me to rely on the legwork of an experienced, well-resourced investor. It doesn’t guarantee that they will make good investments, but it does guarantee that I have access to their playing field in exchange for some of the upside.

Regulations on how a startup shares information can create overhead that makes patent trolls look like teddy bears.

It’s a potential win-win-win for the entrepreneur, lead investor, and tag-along investors like me (I’m tagging along with the Foundry Group’s new AngelList Syndicate; full disclosure: they’re also an investor in my company). To clarify, syndication isn’t a mutual fund. While it allows me to tag-along, I still need to deal with the terms and work directly with the investments, allowing me to learn-along as well. Hopefully I â€" and others â€" will be fortunate enough to become full-time investors in the future.

And when the hoped-for democratization truly happens, we’ll not only see crowd investing platforms send capital to the best talent and opportunities, but also expand entrepreneurship to markets and customers who have been left out. We’d see not only more Facebooks and Googles, but more Chobanis too. Success should come from markets and user bases that have been neglected and ignored. But like all investments, only time will tell. And in this case that range is about 10 years.

So that’s how I learned to stop worrying and love … other investors. That’s really what entrepreneurs and CEOs are good at: picking the right people.

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