My friend Jerry Neumann wrote a great post on angel investing strategies, dissecting truth and myth about different betting strategies and sharing his own approach.

The question of luck came up and a commenter linked to my work on data-driven patterns of successful angel investing with the subtext that being data driven implies index investing. That’s certainly not what I believe or recommend.

The goal of my Monte Carlo analysis was to shine a light on the main flaw I’ve seen in casual angel investing, which is the angel death spiral:

1. Make a few relatively random investments
2. Lose money
3. Become disillusioned
4. Give up angel investing
5. Tell all your friends angel investing is terrible

Well, you can’t expect a quick win out of a highly skewed distribution (startup exits are a very skewed distribution). That’s just math and math is rather unemotional about these things.

You can get out of the angel death spiral in one of two ways. You can take the exit distribution for what it is. In that case, you need many more shots on goal (dozens of investments) to ensure a much better outcome. Alternatively, you can try to pick your investment opportunities from a different, better distribution. That’s what I like to do and this is what Jerry is advocating.

The main influencer of return for angel investors is the quality of deal flow that you can win. Why? Because this changes the shape of your personal exit distribution and, in most cases not involving unicorn hunting, improves your outcomes at any portfolio size.

As an investor, you sell cash + you and buy equity. To see better deals and win them you need to increase the value of “you.” After all, anyone’s cash is just as good as everyone else’s. The easiest way to do this is via deep, real, current expertise and relationships that are critical to the success of the companies you want to invest in, backed by a reputation that you are a helpful and easy to work with angel. One way to maximize the chance of this being true is to follow some of Jerry’s advice:

• Invest in markets that you know
• Make multiple investments in such markets
• Help your companies

There is a bootstrap problem, however, when new markets are concerned. How do you get to know them? Well, one way to do it is to make a number of investments in a new space. In this case, your investments have dual value: in addition to the financial return expectations (which should be reduced) you have the benefit of learning. Yes, it can be an expensive way to learn but it may be well worth it when you consider the forward benefits that affect the quality of your deal flow and your ability to win deals.

As an aside, I’ve always advised angels to not invest just for financial return. Do angel investing to increase your overall utility (in the multi-faceted economic theory sense) and do it so that it generates a return you are happy with.

In summary:

1. Don’t attempt to pick unicorns as an angel.
2. Where you can get high-quality deal flow you can win, do a smaller number of deals.
3. Where needed, and if you can afford it, use higher-volume investing as a way to signal interest in a market and to learn about it so that you can get higher-quality deal flow.