**Disclaimer: What I am about to share has nothing to do with the entrepreneur or company I backed. They were great. This was my mistake, and I am the only one to blame.**
Even the greatest angel investors aren’t perfect. Anyone who tells you they have a flawless track record is either lying, or not playing the game often enough to be a pro in the first place (more on that here).
We all weather losses from time to time. Do they hurt? In a way, sure – but when your overall portfolio is stacked with winners, those losses look more like valuable lessons than painful wounds.
Today, I want to tell you the story of my worst angel investment ever. Now, I’ve debated sharing this story for a long time, because the founders behind this particular startup were (and are) amazing entrepreneurs who I am confident will find great success in life.
And, of course, the last thing I want to do is freak you out or imply that angel investing is a losing game.
I’d be doing you a disservice if that’s what this story taught you – because, in fact, angel investing is one of the best and most reliable ways to strike proverbial gold.
That’s why, ultimately, I decided that you deserve to hear this story: because I don’t want my fellow startup investors to make the same mistake I did. Instead, learn from my experience.
Use it to make your portfolio that much stronger and boost your overall rate of return. If you end up with even more wins than I have, I will have done something right.
It all began back in 2008, when I was approached by the founders of a startup that was looking for seed money. That startup was called EVO.
EVO was out to solve a problem: there are more than 150 million domains on the Internet, and almost a third of them are left completely unused. Many are simply empty; others have longstanding server issues or were abandoned long ago; and some are “parked,” or saved by some unknown owner for possible later use.
That’s a lot of real estate going to waste. EVO came up with an easy way to monetize all that dead space.
I liked the idea right off the bat – it solved a real problem, had the potential to scale without taking on large operating costs, and the founders inspired confidence with their experience and passion. In fact, if they came to me today with another idea, I wouldn’t hesitate to invest in them again.
So I invested. And the business has done quite well.
EVO never went under, and continues to make money. By all accounts, it’s a successful business, firmly planted in the green.
But it doesn’t add any oomph to my overall batting average. Here’s why: EVO’s business model is overly reliant on Google’s site-ranking algorithm.
I won’t get too technical here, but suffice it to say that Google has a system it uses to rank websites based on their effectiveness. Sites that have issues with usability, security, spam, and overall quality are penalized – they don’t come up in Google’s search results page.
When you’re managing hundreds of thousands of domains, it’s pretty scary (and restrictive) to rely on a single potential point of failure. EVO operated within a single channel. And they did so successfully.
But their growth was limited as a result, whereas a business that can work within multiple channels has a much higher chance of becoming huge.
EVO has made a few key pivots since I first got involved in 2008. They’re doing really well, and I’m happy to be part of their story.
But, to be honest, I don’t expect that I’ll ever make a killer return from my investment with EVO. It’s been more than 10 years, and they aren’t on a path that will lead to a big acquisition or an IPO.
And that’s okay. I’m proud of the business they built. Those guys are hard workers who don’t quit. They check all of my boxes when it comes to recognizing exceptional entrepreneurs.
Plus, the lessons I took away from this experience have helped me make better investment decisions going forward.
First, I never invest in small ideas. I want my portfolio’s growth potential to be virtually unlimited – and that means only investing in multibillion-dollar markets (more on that here).
Second, I always take the time to identify possible points of failure. If a startup’s success hinges entirely on one critical assumption, it’s probably not the best choice. A great company has a built-in ability to pivot, adapt, and pursue other avenues if one of their assumptions turns out to be wrong.
Since then, my track record as an angel investor has markedly improved. I learned my lesson the hard way, and grew as a result.
But the way I see it, you shouldn’t have to make an expensive mistake yourself just to learn how to play the game. That’s why you have me… and I’m going to keep the lessons coming. So stay tuned.
Until next time,
18 responses to “My Worst Angel Investment Ever… And What You Can Learn from It”
May 30 2019