(a.k.a. How to Invest Like a Sophisticated Poker Player)
James Haefele, an IT executive at a big company loves poker.
“You play all kinds of hands when you’re a poker player,” James explains. “In fact, that's the fun of it -- isn't it? Poker players who only want to make safe bets aren’t real poker players.”
Like many professionals in the tech sector, James once thought about starting a company, but due to his life circumstances, he couldn’t put his paycheck on the line.
So he did the next best thing: James became an angel investor.
Angel investors typically are accredited investors, which in the United States means that they own more than $1 million in assets (not including their homes) or have earned more than $200,000 annually for the past two years ($300,000 for a couple).
You can find companies and invest individually or join local Angel Investment Clubs, but nowadays, it’s fairly typical to join platforms like AngelList, where you can invest in multiple syndicates led by famous celebrity investors like Gary Vaynerchuk and Tim Ferriss.
“I considered it,” James said, “but I decided to go with Jason Calacanis’ Angel Syndicate because I just loved how he sends his members a formal deal memo that outlines his thesis, followed by a webinar where you hear directly from the founder.
You can see all the investors who are your peers, investing not just their money, but also their relationship and intellectual capital alongside you. It's a more collaborative approach than simply following the lead of someone who happens to be famous or successful.”
James uses his angel investing as a way to be deeply engaged in the startup space without giving up his stable career in IT.
It’s not just about the money for him. He likes being able to mentor these founders and connect them to the right people. “You get to be their angels,” he tells me, “and fund big bets.”
He doesn’t think it’s as risky as investing in the stock market because when you angel-invest, you write your check, then you wait five years to find out if you made the right bet. With the stock market, you can sell a stock or double down at any time and it’s so tempting to check your portfolio every five minutes, especially in times of high volatility.
“In five years, four angel investments may give you zero returns, two of them may breakeven, and two might go up,” James said. Even so, he agrees that investing in startups isn’t for the faint of heart. Then he says with a grin, "but I’m a poker player.” It's important that when you join a syndicate, you trust the lead investor's judgement and instincts. James is confident that Jason Calacanis has the stomach to see his entrepreneurs through the worst of recessions and setbacks because he's seen it all, and lived to tell the tale.
So what is the deal flow like? “I believe Jason has presented his syndicate members a total of 130 deals since his syndicate launched… around one deal per week.” James has seen about 50 of those deals since he joined in 2018. “Some of the deals I didn’t get to see because I didn't invest in the first round and the follow-on funding rounds were only open to those who did.”
An independent angel investing in a startup would find it difficult (if not impossible) to negotiate this into agreements with founders. This is why many new angels lose their shirts and decide this type of investing is not for them. This is where a syndicate’s leverage comes into play: “One of the biggest benefits of being part of a syndicate is you get better terms that are typically only offered to institutional investors or super angels.” James points out.
In poker, you have to play the hand you're dealt. If you join a syndicate, you must be able to strategically pass on deals that do not match your knowledge base, risk tolerance and expertise. “When you do follow on bets, you’re making a decision to continue investing because of your belief in the company, where they have reached, and where they are headed, said James. “No different than playing a hand of poker - you still have a positive expectation as you put more money in when the hand progresses,” said James. He’s convinced that the syndicate is a great fit for a serious poker player who is willing to be thoughtful and strategic, and good at reading people.
James made his first investment in August 2018 -- the very month he joined because he believes in learning by taking action.
“You don’t have to participate in every one of the opportunities you're presented with. But by simply considering each opportunity, you automatically become a better angel investor.”
Though he has not yet seen any exits from the deals he’s invested in so far, and doesn’t expect to know the outcome of his investments for five years at the very least, he’s very bullish on angel investing. “How often do you get to be the first investor in a startup that could be the next Calm.com or the next Uber? Jason has built a reputation of backing founders that no one else will fund.”
Once upon a time, there were only a handful of powerful business angels like Ron Conway and influential venture capital firms like Kleiner Perkins in Silicon Valley who decided which startups received funding. Now with syndicates, there are many more options available to entrepreneurs who may not be able to qualify for a traditional VC investment.
VCs who don't have the wherewithal to do all the leg work of finding good entrepreneurs and getting them ‘investor-ready' seem to like these syndicates too. They can come on board when the company is further along in its evolution.
Entrepreneurs see a lot of benefit from 100+ micro-angel startup investors cheering them on and helping them succeed by making connections and sharing advice. In fact, the smaller the investor, the more invested they are in the success of the startup! But on the capitalization table, it still looks tidy because legally, these startups are taking money from just one investor.
Sometimes, a group of business angels betting on a disruptive idea is all it takes to attract funding from bigger investors in later funding rounds. The way James sees it, “Jason takes chances on people who wouldn't have been able to raise money otherwise and I’m proud to support that.”
The way it works within Jason’s Syndicate is you get one to two weeks to commit to a deal, and it takes one to two months for the round to close. “There are around 4,000 people in the syndicate, and only about 100 to 200 of them invest actively in any one deal.”
So what if more people join the syndicate? James didn’t see that as a problem, “I’ve gotten trimmed down a few times, but I still think, more the merrier. We're stronger together and we have more assets to bring to our CEOs collectively.”
The minimum investment you can make in any deal at the moment is $2,000. Members who invest $10,000 or more are guaranteed a pre-allocation into the deal.
“If a deal is oversubscribed, someone who invests $10,000 is more likely to get a space earmarked for them, James explained, “But even when I’ve invested less than 10,000, I’ve been able to get into most deals. There have been some situations where only $5,000 was allocated to me, when I wanted to invest $10,000. Everybody is reduced down when there's not enough to go around... so it seems fair,” he added.
James spent $500 to attend Angel U in New York City and he recommends it highly to new angels. “It was a good investment to further my education, become a better investor and network with others. Just the networking alone was worth the price of admission.” Serious players make similar investments in learning poker when they first start out, and many personal and business relationships begin at the poker table.
Of course, Jason Calacanis has many critics. He is not the most diplomatic person. If your feelings are easily hurt, you may not want to be around him. In fact, he can be quite abrasive. Is a New Yorker who tells it exactly as he sees it the right leader of an angel syndicate? James said about Jason’s leadership, “His results speak for themselves. From an investor standpoint, he’s democratized angel investing. Other startup incubators and accelerators have Demo Day, but smaller investors like us don't typically get access to that type of deal flow.” It seems that once you’re in Jason’s circle, he’s got your back as long as you play by the rules.
Poker players take bets on things that other people do not have the risk tolerance for. For example, James is willing to put money in even when it's not reflected on what he sees on the table.
“You can’t just invest in mutual funds, if you want to make outsized returns. So if you're willing to take some risk... the syndicate is one option to do that.
In fact, he boldly suggests that upper-middle class parents may be better off letting their kids use their $120,000 college fund to safely learn angel investing through syndicates instead of wasting it on a 4-year college education.
It is generally not recommended that investors allocate more than 4% of their net worth into angel investing because it is very high risk. James sees it differently. “Early in my life, I made a bold investment decision that made it possible for me to buy my first home.
Angel investing is my way of increasing my wealth at this stage of my life, while continuing to hold down a job.”
Like in poker, angel investors are doomed if they go in with unrealistic expectations. James knows he will lose money on most of his 11 angel investments but he’s bullish on at least three he made through Jason’s Syndicate, “Hands down, KUSH, STEEZY and GRIN are my favorites, because I like platforms, marketplaces and protocols,” he said excitedly. “STEEZY is a dance platform that I invested in -- I really liked the founder there and GRIN is a platform related to influencer marketing that I feel has a lot of potential. My investment in BEGIN gives me exposure to the hot serverless space and I also like ASSURE.
All of them are high risk so they may not amount to anything,” adding with the casual nonchalance of a poker player, “But I’m willing to take that risk. If I’d chosen the startup route, I would’ve been ‘all-in’ on just one single bet. Spreading out my risk across 11 investments I’ve thoughtfully curated is a much more leveraged strategy.”
James Haefele thinks this is a great way to have the best of both worlds. Of course, he has the stomach for risk -- and is willing to wait a long time to see if his bets pay off.
Dear Reader,
This is my first article on HackerNoon! I'd love to know what you think :-)
I spoke to James as part of the due diligence I did before I started down the road to angel investing. If you’d like to join a syndicate or become an investor, feel free to get in touch on LinkedIn. I‘d be happy to connect you to the ones I’m part of.
If you the founder of a company that already has traction, get in touch if you’d like to identify the right angel investors.
Neesha Mirchandani