So you want to invest in startups...

Get a reality--and value check--before writing your first check

Welcome to the latest entry in The Captain’s Log…

I’m your host, Bob, and my mission here is to share personal, behind-the-scenes stories of ups and downs from my career leading tech startups and corporate innovation.

I write to make you think, smile and discover a shortcut to success or a trap to avoid. Here we go…

Carta published an IRR range of VC funds by year. Back in 2012, I invested in two VC funds. I had to edit their graph to show my investments’ performance

Last week I got an email from one of the alumni organizations I’m a part of announcing a new partnership with a startup investment platform. It certainly got my attention with this headline:

“Imagine that you’d invested $100 at $3/share in Zoom pre-IPO. What would that investment be worth today? The answer is $2,170. That is an annualized total return of 47%. Quite a bit higher than the S&Ps 9% average rate of return.”

Ah, yes, if only we could go back in time and invest in Zoom, Amazon, Apple, or Facebook at their pre-IPO prices. More and more of us hear the siren call of startup investing, thanks to unending media coverage of these and many more massive success stories. And there are a growing number of platforms that allow us little guys to get an earlier piece of the action.

Alas, while it’s easier to get into an early-stage investment opportunity, getting a piece of a big winner is still incredibly difficult. Many individuals dream big and investment firms selectively promote their success stories—but almost no Angel investors share their personal experiences, pros, and cons. But I recently read a thoughtful and detailed post by DC Palter, who shared a compilation of his Angel investment results, and he inspired me to do the same.

I am not a financial advisor, and your results will vary. I’m still waiting for the big financial payoff, but I’ve found a way to realize the personal value that keeps me excited about supporting founders.

Recycling a Win + Paying it Forward

In 2011, the digital advertising agency where I was a partner completed its acquisition and five-year earnout. I suddenly had some winnings to invest. Like many business owners who have exited, I felt compelled to put some of this money to work on supporting other startups in our community.

I think there are a few reasons many of us do this. First, there’s a desire to stay in the game. You’ll see lots of deals if you spread the word that you’ve started angel investing, and this can keep you busy when you’re trying to decide what to do next. Second, having been part of a win, you believe there are more wins out there that you can be a part of—with much less pain and suffering of building them yourself. Finally, we want to support other entrepreneurs. We recall that it took a village of help to make it through that suffering, and we know that support from founders that have been in your shoes is magical.

So I spent a few months taking meetings and looking for a fit. My initial pull was to venture capital funds that invested at the Seed and Series A stages. The main reason was that they made it easy to put capital to work and brought high standards and professionalism to the process. I figured I could “see” several companies’ journeys at once by being part of a fund. And I liked and trusted the leaders of these firms and knew a few companies in their portfolios.

But I also met with a pair of startup founders, Mike Sarow and Matthew Dooley, that were launching a new consumer product. The pair had a killer vision and product idea that I couldn’t get out of my head. Their product, Kapture, was a wrist-worn device that would continually record about a minute of audio. Way before other smartwatches, they saw this specific opportunity to capture real-world audio snippets ranging from your child’s first words to that thing your spouse asked you to do that you already forgot. I decided to make this one individual angel investment, too.

+10 Years of Investment Results

I made a set of investments from 2012 to 2015, and most are still alive to some extent today. Here’s a summary below. Note that I’m leaving out exact dollar amounts because, well, I find it’s still weird to talk about personal investment numbers.

1. $50 million VC Fund

Summary: Fund with experienced investors that have been in the business for +20 years. They focus on tech companies and love B2B SaaS. The minimum investment was six figures. I vividly recall the managing partner of the firm telling me that “by year 5, the exit winnings should be self-funding future investments.” That sounded great to me! I made my investment in 2012.

Results: At the end of 2022, the fund has returned 45% of its initial investment. That’s right, I’m not even halfway to getting my money back after 11 years. By comparison, if I had just put it into the stock market, I would have tripled my initial investment by now. The fund still has some active companies in its portfolios, but they will unlikely be the next Zoom. (Note to VCs: Never promise anything.)

2. $10 million VC Fund

Summary: Fund focusing on Pre-Seed, Seed, and some Series A. The fund received matching dollars from a government entity—minimum investment in the 5-figures.

Results: At the 10-year mark, this investment has returned 33% of its original amount to investors. Again, I’m losing my shirt compared to a simple index fund. There’s hope that the few remaining companies could get investors to break even.

3. $2 million Founders Fund

Summary: While it operates like any VC fund, this one was started by a group of founders in our local community. Its strategy has been to be “add-on” investments to other funds’ rounds—earning its way in by bringing their personal experience.

Results: At the 8-year mark, this fund has returned 1.5x to its investors. That’s right, a positive ROI! While its bets are smaller, they’ve gotten into some great deals, including a 22x winner. There’s also more upside on this baby, so I have a real crack at beating the S&P. I’m kicking myself for investing the least into this fund.

4. $700k Angel Seed Round Investment

Summary: First money into this hardware+software startup.

Results: I made a small investment as part of this initial round. Matt and Mike worked their asses off getting their product to market. They created novel software and hardware, raised a successful Kickstarter campaign, and got the device into our hands—and it worked! Unfortunately, there were many challenges that they couldn’t find a path through in time. My investment return is $0.

Learnings in Progress…

Despite my very weak investment performance, this experience has given me insights I would never have without putting some skin in the game. Here are some of the takeaways that still guide my thinking today:

• Assume a 0% Return - Never, ever put money into high-risk ventures with the idea that it will become millions someday. As seen above, even professional investors struggle to get a positive return. There’s no rationale for this in your retirement portfolio. If you want to dive in, this should be “Vegas Money” that you know going in is unlikely to pay off—and the purpose is more to enjoy the ride.

• Invest in Yourself First - By far, the best return on my portfolio of investments has been on the companies that I have founded. Before you put money into someone else’s startup, create a future fund for your own venture, whether it’s a future startup idea or a side hustle.

• Back Founders You Believe In - Part of “enjoying the ride” in startup investing is interacting with interesting, high-energy entrepreneurs periodically. They won’t have time to become your best friend, but through periodic meetings and investor updates, you’ll get exposure to sharp people. This is what I missed in my traditional VC investments.

• Invest in a Community - There’s nothing better than backing the companies in your local market. It’s a chance to see your dollars working to make the area grow, and you’ll have more chances for engagement with the founders and fellow investors. And local Angel investment groups can be a great way to get community value. They usually have in-person meetings, education sessions, and other events that will bring benefits beyond pure IRR. Plus, they work harder to build relationships between investors and founders. If you’re in Cleveland, check out North Coast Ventures, a best-in-class angel group that has backed my past two companies.

The older I get, and the more time I’ve spent in business, the more I realize value the personal value that comes from the investments I have made in other people. I still keep in contact with Matt and Mike from Kapture. We’ve helped each other find new jobs, clients, and employees in the years since they shut down their startup.

This is how I approach startup investing today: Once or twice a year, I put a little money behind an energized individual heading into the arena for the first time. I’m rooting for them, and I’m here to help on whatever, whenever. But my expectation for a massive payout in +10 years is low. Any future check is the icing on the cake.

I’m signing up to be a supporter on their journey. I only hope they feel a positive return on having me at their side—no matter how it all ends.

As always, thank you for reading and sharing my posts. The more subscribers I get, the more motivation I have to keep writing!

Bob Gilbreath is a 2x-exit entrepreneur and co-founder of Hearty, a curated matchmaking service that combines top software developers with early-stage, venture-backed startups.