Brian Nichols is the co-founder of Angel Squad, a community where you’ll learn how to angel invest and get a chance to invest as little as $1k into Hustle Fund's top performing early-stage startups

The temptation when starting angel investing is to begin investing immediately and learn through experience. This approach works eventually, but the tuition is paid in lost capital and missed opportunities. Better to build foundation knowledge first, then apply it through practice. The learning costs are lower and the outcomes better.

These are the seven things you need to learn before angel investing, presented in the order that builds understanding most effectively.

1. Portfolio Construction Fundamentals

Before anything else, understand why portfolio construction matters more than deal selection. This counterintuitive truth shapes everything that follows.

Power law returns dominate early-stage investing. A small percentage of investments generate the vast majority of returns. This isn't like public markets where returns distribute more normally. In angel investing, outliers are everything.

Diversification captures outliers rather than reducing them. Unlike traditional diversification that reduces volatility, angel diversification ensures you have enough shots on goal to likely capture the outliers that drive returns. With too few investments, you might miss winners entirely through random chance.

Twenty-plus investments represents minimum adequate diversification. This number emerges from probability math about capturing outlier returns. Fewer investments means higher risk of missing winners regardless of selection quality.

Consistent check sizes outperform conviction-based variation. Since you can't reliably predict which investments will succeed, equal sizing across investments produces better outcomes than betting big on favorites.

As Elizabeth Yin, co-founder and GP of Hustle Fund, explains: "Most of your investments will return $0. You will lose money. So it's important to have great portfolio construction."

This lesson comes first because it shapes how you approach everything else.

2. Investment Structures and Terms

Understanding how startup investments actually work prevents costly misunderstandings about what you're buying.

SAFEs have become the standard early-stage instrument. Simple Agreement for Future Equity isn't equity itself but a promise of future equity when specific events occur. Understanding conversion mechanics matters because they determine your eventual ownership.

Valuation caps set maximum conversion prices. The cap determines the highest valuation at which your SAFE converts to equity. Lower caps mean more ownership. Understanding what caps are reasonable at different stages helps you evaluate terms.

Post-money versus pre-money caps calculate differently. Post-money caps include the money being raised in the valuation calculation. This distinction affects your ownership percentage meaningfully.

Dilution occurs through subsequent funding rounds. Your ownership percentage decreases as companies raise additional capital. This is normal and expected. Understanding how dilution works prevents surprise when ownership percentages shrink over time.

3. Team Evaluation Frameworks

At early stages, team is often the primary evaluable asset. Learning how to assess founders improves your evaluation quality.

Relevant experience provides signal but isn't everything. Founders with domain expertise often execute better in their domains. But exceptional founders also succeed in new areas. Experience is input, not determinant.

Execution evidence matters more than credentials. What founders have actually built and accomplished signals capability better than where they went to school or where they worked. Look for evidence of getting things done.

Cofounder dynamics affect outcomes significantly. How founders work together, how responsibilities divide, and how they handle disagreement all matter. Dysfunctional cofounder relationships sink many otherwise promising companies.

Coachability and adaptability indicate founder quality. Early-stage companies must evolve as they learn. Founders who can absorb feedback and adapt their approaches often outperform those with rigid visions.

As Eric Bahn, co-founder and GP of Hustle Fund, emphasizes: "For beginners, a bigger startup portfolio is better. It helps with diversification and helps you learn and get reps in. Investing requires practice like everything else."

Team evaluation improves through practice seeing many teams, which requires building portfolio across many investments.

4. Market Assessment Approaches

Understanding how to evaluate markets quickly helps you assess whether companies have sufficient opportunity.

Market size matters but is easily manipulated. Founders present TAM/SAM/SOM numbers that often stretch credibility. Develop skepticism about top-down market sizing while still caring about whether markets are large enough.

Market timing often determines outcomes. Being too early or too late matters as much as market size. Consider whether conditions are right for the solution now, not just whether the problem exists.

Competition indicates market validity. Some competition is healthy signal that the market exists. No competition might mean no market rather than a unique opportunity.

Regulatory and structural barriers deserve attention. Some markets have regulatory complexity, entrenched incumbents, or structural characteristics that make startup success difficult regardless of team or product quality.

5. Due Diligence Calibration

Learning what level of diligence is appropriate for different situations prevents both under-research and analysis paralysis.

Check size should calibrate diligence depth. For $1,000 investments, 2-3 hours of diligence is appropriate. For $25,000 investments, more extensive research makes sense. Match effort to stakes.

Early-stage companies have limited evaluable information. Much of what matters about early-stage companies can't be analyzed because it doesn't exist yet. Accept that uncertainty can't be eliminated through research.

Reference checks provide valuable signal. Brief conversations with people who know the founders often reveal more than extensive document review. Prioritize references when available.

Standard terms reduce diligence burden. When terms are standard for stage, you don't need extensive legal analysis. Focus diligence effort where it matters most.

As Shiyan Koh, co-founder and GP of Hustle Fund, notes: "Great founders can look like anyone and come from anywhere."

Diligence should focus on substance rather than pattern-matching to expected founder profiles.

6. Community and Infrastructure Selection

Understanding what community membership provides helps you choose wisely and engage effectively.

Deal flow quality depends on sourcing. Evaluate where communities source opportunities. Institutional backing like Hustle Fund's pipeline provides quality that random sourcing doesn't.

Educational programming varies in value. Active practitioners provide more relevant education than academics or retired investors. Prioritize learning from people making current decisions.

Peer community matters for sustained engagement. Fellow investors provide discussion partners, accountability, and shared experience. Evaluate how active and engaged community members are.

Operational infrastructure affects practical experience. Communities that handle SPV creation, documentation, and administration let you focus on evaluation rather than paperwork.

7. Realistic Expectation Setting

Understanding realistic outcomes prevents disappointment and poor decisions based on misaligned expectations.

Median returns are modest. Median angel portfolios return roughly 1.0-1.5x over 10 years. This isn't exciting financial return. Top quartile achieves 2.5-4x, but you're more likely median than top quartile.

Non-financial value often exceeds financial returns. Learning, networks, and engagement provide value that many angels rate higher than their financial returns. Explicitly valuing these benefits changes the calculus.

Timeline is genuinely long. Seven to ten years isn't metaphor. Outcomes actually take that long. Set expectations accordingly.

Angel Squad helps you learn all seven topics: institutional deal flow teaches quality standards, weekly education from active GPs covers frameworks, community discussion builds evaluation skills, and $1,000 minimums enable learning through practice across many investments.