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The Devil's Guide to Angel Investing

Venture south fallback
Venture South Team
Last updated: June 5, 2024
Devilsguide

In this week’s reading “recommendation,” we are providing a bit more information on the book we’ve been reading – as it’s a fun but problematic one.

The Devil’s Guide to Angel Investing by Matt Skinner is a short intro (92 big-font pages) about investing in private companies and real estate deals.

Its thesis - that people should consider investing in private companies, but should be careful to recognize and avoid “red flags” - is straightforward and clear. The author’s unique angle is that he’s a convicted felon, having pleaded guilty of securities fraud, and so knows a thing or two about things to avoid!

We’ll leave you to judge if his treatment (pages 37-43 and 87-92) was fair and justified; we'll focus on his angel-related suggestions, and supply a few corrections

On the plus side, we obviously agree that:

  • angel investing is something worth considering
  • that you should avoid con artists, do your diligence, and be diversified (p.27)
  • that investors bet on the jockey not the horse (p.47), 
  • and that entrepreneurs should provide good and timely communication (p.38). 

And his list of red flags (marketing materials not matching legal materials, companies not filing their SEC docs, no board, not being transparent with documents, etc.) are good checklist items for diligence.

But the list of negatives here are long. Not to kick someone when they’re down, but there is a lot that is just...wrong.

  • “At the point a company is revenue positive (not necessarily profitable) is when the entrepreneur can take the product and business plan to angel investors” (p.16). It can be easier to raise money if you have revenue, but in fact MOST angel investments are made in pre-revenue companies. (70% per ACA Funders Report 2023 (p.9). Also this.)
  • “The best way for an angel to make a $100,000 investment…is by utilizing the convertible note” (p.18). And “Convertible notes are very commonly – almost exclusively – used by angel investors when investing in startup companies” (p.28). Not the best way, and not the most common way.
  • “Venture Capital (VC) and Private Equity Groups (PE) buy into companies after angel rounds and typically when the company is profitable or has a very clear path to soon becoming profitable.” (pp.18-19). True for PE funds, but not true for VCs – especially in 2021-23, but still true today. He similarly doesn’t understand, or at least doesn’t explain well, dilution (p.19).
  • “Wise angel investors don’t invest in a person’s promise to do work…” (p.25). That’s exactly what angels do…do. And we protect against what happens if the person doesn't work, through (among other things) vesting.
  • “What makes either investment a security is that the investor has zero management role and zero say in how the operation of the company is conducted once they have made their investment decision.” (pp.31-32). Nope.
  • “Most angel investors today invest anywhere between $25,000 to $1 million” (p.5 and p.75). This is one of the ongoing angel investing “myths”. The median investment by a VentureSouth member is $10,000 (and the smallest is $5,000). 

Ultimately, then, the Devil's guide is worth reading, but please be cautious using it – and prioritize alternatives written by other people called Matt who are experts for good reasons in this space.