I lost my entire investment. Twice. These are my worst losses as an angel investor.

Everyone online wants to talk about their wins. But you really want to learn something? Lose some money and feel the sting.

Here’s the mistake I made and why I’ll never do it again…

Two Strangely Similar Companies

A couple of years ago, I made two investments that looked rather similar.

Both founders were wonderful. Deeply committed, incredibly hardworking.

Both products were very innovative. Had they worked, they would’ve been giant outcomes.

But both startups had the same problem: their bank accounts were running low.

These companies didn’t have an active round going. So, at that particular moment, my money was the only investment cash coming in.

Since both these startups were breakeven or slightly profitable, I didn’t worry about it. But here’s what I didn’t realize…

How These Bets Went Bad

A small profit can turn into a big loss pretty quickly. A customer churns, a usage-based scheme doesn’t get the usage you imagined, etc.

When that happens, you need a cash cushion. If you don’t have it, you’re toast.

Had I invested in these startups alongside a lead, they’d have had a few million dollars to fall back on. But I didn’t.

Both founders held on much longer than I ever expected. But eventually, they had to admit reality and close up shop.

The One Thing I Did Right

As dumb as my decisions were, I did one thing right: bet sizing.

I made tiny feeler bets on both these companies. As painful as these losses felt at the time, they were actually quite small in the context of my portfolio.

Let’s take the “fund” of 36 companies I’m investing out of right now. These losses represent just 2% of it.

I don’t make a larger investment until the company sees some real success. My biggest investment is 11% of my portfolio, and that company is doing a lot better than these two.

What I Learned

If I had invested in these 2 companies alongside a lead who put up millions, they might still be operating today. Not waiting for a lead was the key mistake I made.

Fortunately, I only made that mistake twice in 35 investments. I won’t be making it again.

Today, I look for a lead putting a minimum of 12 months runway or $1 million (whichever is more) into the company. I’m also fine with a party round so long as the company has that same amount of cash signed and wired. In fact, my most successful investment to date was a party round.

With that kind of cash coming in, the company can weather some serious hits without going out of business.

Wrap-Up

These two founders did nothing wrong. They’re wonderful entrepreneurs.

They worked incredibly hard to make those companies work. But it just wasn’t possible.

I’d back either of these guys again in a minute.

It was me who made the mistake. I shouldn’t have invested without a lead.

Mistakes happen. They’re the cost of doing anything ambitious. We just need to learn from them.

And this is a mistake I won’t make again.

More on tech:

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Don’t Give Answers. Ask Questions.

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