discovery into passive-active investing

I recently attended as a speaker on a panel talk with HustleFund on “How to Decide If Passive Or Active Angel Investing Is Best For you”. Active Investing is generally akin to running a fund and/or sourcing your own deal flow in what we call outbound while passive is frequently responding and investing to incoming deal flow.

But the caveat here is achieving a successful passive strategy requires picking up the low hanging fruit and then some. The process can be automated but initiating those processes requires upfront work and given there is no right way to get deal flow and the medium continues to evolve, there will always be a need to build some active strategies in to the mix. In order to become “passive” successfully you need to build up the right “channels” that meet your criteria and identify to your thesis and continue to actively help founders or add value to co-investors such that the flywheel continues to meet your goals.

Let’s define what my inbound success criteria is – similar to HustleFund’s hilariously early investments, I lean heavily on investing in pre-seed and seed stage deals aiming to hit 10-20 deals a year with a minimum 1k check size annually. In order to land success early stage, you would need to try at 100+ investments to hit a probabilistic ratio to land 100x bets. Learn more on portfolio construction here. In addition, a significant portion of my investments are QSBS qualified or invested through my AltoIRA alternative asset Roth IRA, accounts to maximize investing with no tax on gains if the sole purpose is to continue investing, via early acquisitions or liquidity. As long as the investing accounts are partitioned off, you can repurpose any proceeds for future investments.

Given the best deals are oversubscribed*, in order to win this strategy, you need to start active-passive and shift passive-active. That’s a mouthful so what do I mean? To start “active-passive” means finding “channels” where you can get deal flow and then find co-investors who are already participating in those deals or “channels”. I’m in well over 21 syndicates on Angellist. A lot has been said about the signal vs noise ratio on joining syndicates on Angellist but given the enormous existing network of investors, if we believe the best investors remove friction on wiring checks quickly, it will continue to attract the best syndicate leads and consequently deal flow.

As you amass enough syndicates with high quality and volume of deals, you can advance from discovery to your selection process. We’ll skip selection for another writeup but it’s critical to have an investment thesis. Investing by nature is opportunistic so it requires having a view of the world where the future state has products and services that will be infinitely more valuable that are under appreciated or simply do not exist.

You can have multiple thesis but in order to be an effective passive-active investor, you believe something of the world AND can provide value given your unique brand & skills. However, here is a cheat code. You can greatly increase your value by making your existing network active.

I recall the excitement when I first reached out to a founder based in Egypt who had a strong product design background and wanted help with his GTM and fundraising process. I felt helpless. It took me years to realize actively helping meant putting in the effort to reach out to my own network and paying attention to a diverse set of operators and investors who can and are willing to help. Through my experiences, here is what I believe to be true of the future state of the world.

Investing in private companies is becoming more mainstream over the next decade and new risk profiles will underwrite a new class of emerging investors. How we raise funds, who we raise from are becoming universal and accessible and the tools and services unlocking the formation of internet-enabled businesses is ripe for disruption. Technological advancements in fundraising and utility in web3, ease of distribution through new media and the creator economy and trends in AI, no code and low cost infrastructure capture a significant mindshare in my investing decisions.

As an active operator and engineer I spend majority of my working week building 0 to 1 net new products that further enable developers to create multi-million dollar ventures. In addition, as an engineer working in venture-backed technology companies for over a decade, I’m continually exposed
to products that form a vast majority of successful SaaS b2b2 technology companies.

There isn’t a single way to source deal flow and there certainly isn’t a single way to add value. Here are few steps I’ve taken to expand deal flow.

• Joined well known angel networks HustleFund, Gaingels with diverse investors and build relationships complementary to your own brand/skills sets.
• Joined Alumni networks dated back from high school, Slack channels from past jobs, web3 DAOs I’ve actively participated in, and any online communities I could think of. If you’re an active web3 developer you can also get access to exclusive communities of builder and hackathon networks.
• Find operators who run Syndicates you’ve worked with or have come to learn that match your investing thesis through podcasts, newsletters, and events.
• Leverage twitter to meet interesting new investors from your initial group.
• Upcoming startup founder networks where operators are looking to build something i.e. OnDeck, Pioneer, raise funds i.e. YC list, RaiseSeed, where builders are building profitable companies ie. Acquire.com, IndieHackers, or launching new products ProductHunt are all ways to complement your deal flow.
• Track new founders under ‘stealth startup’ or ‘starting something new’ by scraping twitter, Harmonic.ai and Crunchbase profiles.
• Follow builders and developers on social code sharing platforms ie. Github, Gitlab and track their recent projects, commits and highly sought after open source libraries that have the potential to become on prem services.

In addition to joining, I would recommend reaching out and lending a hand simply by asking syndicate leads on how you can help them with the skills you currently possess.** Key is to join for quality as quantity will come with time and repetition.

You can pair these inbounds with any distribution channels you create through blogging, podcasts and dinners with operators. Simply letting people know you are investing in your social media profiles will get you access to deal flow.

While founders have a vast network of founders who have already started companies, a huge percent are new founders who do not have existing networks. And professional investors including emerging managers and large scale venture capitalists have built up the largest deal source simply being around for a long time. And often that deal source won’t fit their criteria. I’ve seen a significant portion of new investors that are simply building co-investor relationships and gaining an allocation.

The easiest way to be helpful is to create a collection of angels in your network that can help with jobs you aren’t an expert on and assist with, advise or help vet candidates that can help with a given task.

If we’ve already connected online, feel free to join my network on Brdg

If you found this helpful, or want to share your thoughts reach out on async.com/artivilla.

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**It is preferred to do this in an async manner via a personal website or a 1 pager you can forward.