Back in 2005 I suddenly found myself sitting on a big pile of money after the Google IPO so I did what any young nouveau-riche high-tech dilettante would do: I started angel investing. I figured it would be more fun to be the beggee than the beggor for a change, and I was right about that. But I was wrong about just about everything else, and I got a very expensive education as a result.
Now that I am older and wiser (and poorer!) I can look back and see that I did some incredibly stupid things that I could easily have avoided if I'd just gotten myself some proper mentorship. But I was in LA at the time, and good con men were more plentiful than good mentors. But it's Sunday morning, I'm up (relatively) early, I don't feel like writing code or complaining about Donald Trump today, so instead I'm going to write the blog post that I wish someone had written for me back in 2005.
The first thing you need to decide is whether you are investing as a hobby or as a serious attempt to make money. If you're doing it as a hobby you don't really need to worry about much, except to prepare yourself for the likelihood that this could end up being a very expensive hobby. The absolute minimum to play the game even once is about $5-10k, and if that's all you have then you will almost certainly lose it. You're more likely to make money by going to Las Vegas and betting on roulette. If you are investing casually you should be prepared to lose every single penny you put into it without regrets.
If you are investing as a serious attempt to make money then you have a much tougher row to hoe. Basically, the process goes like this: your early deals will almost certainly not pay off. You have to approach them as if you are buying an education for yourself. You will find some awesome-looking deals, ones that you will think are absolutely 100% certain to be the Next Big Thing (NBT), and you will be tempted to buy as big a stake in them as you can afford because you don't want to miss out on the NBT, because NBTs doesn't come along very often.
Don't do it. The odds that what looks to your inexperienced eyes like an NBT is in fact an NBT are vanishingly small. There are vastly more good pitches out there than there are good companies. If it were easy to tell the difference, then Y Combinator — who by now are as good at picking winners as anyone and better than most — would not have to invest in hundreds of companies every year, they would just go straight for the winners.
Here's how it goes: you will (almost certainly) lose money on your early deals, and you will be shocked when this happens. You will be shocked even if you were intellectually prepared to see your investment fail because the way in which it will fail will almost certainly come as a surprise to you. You will be amazed at the stupid shit that founders do, the evil shit that competitors do, and the completely random fucked-up shit that markets do (like completely ignore products that are clearly superior in every conceivable way!) There are a myriad ways to make a company fail, but only two ways to make one succeed. One of those is to make a product that fills a heretofore unmet market need, and to do it better, faster, and cheaper than the competition. That is incredibly hard to do. (I'll leave figuring out the second one as an exercise.)
So your early deals will fail unless you get incredibly lucky. Your goal at this point is not to make money, but to learn from the mistakes that you and your investees will inevitably make. Starting a company is not a linear process. There is no recipe for success. It's a long hard slog of never-ending problem solving, crisis management, and plain-old shit work. Some people just have the knack for getting through this, but most don't. Your goal is to develop a sense for how to recognize the people who have the knack, and distinguish them from the ones who are good at giving the impression that they have the knack, but really don't. This is hard because being a good con man is much easier than being a good entrepreneur. And by no means are these two talents mutually exclusive.
This early stage will last several years, and if you're not prepared to act on those kinds of time scales then you'd better find yourself a different path in life. During that time you should be taking meetings constantly. Why? Because the more people you meet, the more data points you will gather about what success looks like early-on (and, more importantly, what failure looks like early on), and the more likely you are to find the needle in the haystack.
Actually, the needle-in-the-haystack is not quite the right metaphor. There is a small cadre of people who actually have what it takes to successfully build an NBT, and experienced investors are pretty good at recognizing them. Because of this, they don't have trouble raising money. As I mentioned earlier, one of the reasons people get into angel investing is because they think it's more fun to be the beggee than the beggor. But the cool kids don't beg. The cool kids — the ones who really know what they're doing and have the best chances of succeeding — decide who they allow to invest in their companies. And they want investors who have been around the block, who know what they are doing, who have a thick rolodex of potentially useful contacts, and most importantly, deep enough pockets to do follow-on investments, and thick enough hides not to complain if things go south.
If you want to make money angel investing, you really have to treat it as a full time job, not because it makes you more likely to pick the winners, but because it makes it more likely that the winners will pick you.
If you're not ready for that, you will be much better off financially buying index funds.