We’re in a startup culture right now. Any kid who can code has a potential 5-year path to the land of billionaires, and it’s become dull and commonplace (but still impressive) to meet yet another entrepreneur at a social gathering. It used to be that artists and writers carried the most mystique; that’s not so anymore.
But living in a culture that celebrates startups and entrepreneurs is not the same as living in a world where their paths are paved before them. Despite their idyllic status, the biggest threat to great and innovative startups and talented entrepreneurs is a lack of funding, pure and simple. Capitalization is essential to taking truly groundbreaking ideas to market, but while we provide lip service to the entrepreneur, not enough of us are stepping up with the cold, hard cash that makes these startups fly.
When people don’t do something I know they should be doing, I always assume it comes down to education: They just don’t know. With that in mind, I thought I’d rehash the three incredibly simple reasons that everyone (and by “everyone,” for now, I mean all you accredited investors out there) needs to have at least some skin in the angel investing game.
1. Financial Gain:
Yes, be selfish, very selfish. Well-diversified, professionally managed angel portfolios earn over 25 percent return on investment — consistently. Check the research. It’s a less regulated industry than its private equity brethren and public markets. The threat of adverse selection on your portfolio can be very real, but those who invest in a professional setting with robust deal flow and the proper legal and analytic support do well.
Along the same lines, angel investing is the best way to divert some of that cash away from volatile (and, might I add, occasionally tapped-out?) public markets and start investing where your money can have a really concentrated, powerful effect. Stockbrokers go on and on about diversification, but if your idea of diversification is just adding more stock symbols to your portfolio, you’re still putting your fate in the hands of whichever nontrade gets his hands on the next fastest data transmission device that lets him manipulate public markets and create mass hysteria for everyone else. Half the time, the market does what it does and no one can really explain why, except to blame “public sentiment.” I’m not saying it’s the worst investment, but it certainly shouldn’t be the only 1.
2. Public Good:
Yes, selfishness can do a lot of good. We angels are in it to make money, but we believe we’ll make money because capitalist markets create demand for the necessary innovations of our time. If we can’t make money investing in it, it’s because the world doesn’t need it. That’s why you see a lot of the prominent angels and angel groups really scrutinizing app-based and mobile startups. A few years ago, that was changing the world; today, we’re seeing just a little too much duplication and fragmentation in those markets, so we’ve got our eyes out for bigger innovations with longer tails.
The public good point is one that people, from time to time, like to tell me I shouldn’t bring up. They say it makes angel investing sound too idealistic. But you know what? A lot of angels are idealistic. They’re realists, too (you can be both). The majority of angels were once entrepreneurs themselves, and they tend to see the world as one big opportunity for positive change. That doesn’t mean we all wear Toms and hair shirts, but at the early-stage level, if you’re going to put cash behind an entrepreneur, you’d better feel something beyond the vague satisfaction of a pro forma that hints at profitability.
3. Use Your Smarts:
Angel investors get to be active investors. That’s not the same as saying angel investors are meddlesome, but when relationships between early-stage companies and the angels who fund them are structured properly, entrepreneurs have a constant lifeline of seasoned, experienced investors to help them navigate.
Meanwhile, angels get to use their extensive industry expertise and insight to help select quality investments. When participating in an angel group, you get the benefit of multiple backgrounds and experiences when vetting funding applicants. The value here cannot be understated: In our own angel meetings, we see extremely in-depth discussions, no matter what industry the startup is in. From biotech to pharmaceuticals to consumer products and IT, someone in the room is there to help educate the others. Angel investing is truly the only stop on the private-to-public market spectrum where your experience, and that of your esteemed peers, has such a direct effect on the health and performance of the investments you make.
As I mentioned before, there are a few ground rules to follow to make sure you don’t wind up a fallen angel. Call me biased, but I truly believe that a national group structure keeps you and your portfolio safe (there’s that idealistic capitalist in me — I started the business because I believed in what we do). But no matter how you pursue it, the keys to success in this world are fairly universal: Do lots of deals of many types in lots of industries and regions, with as much advice from trusted peers as possible.
However you go about it, the first step is to start looking at deals. Check out an angel group online or near you, and see the kinds of deals and processes they’ve got going on. Dip your toe in the water. After all, a portfolio that earns over 25 percent in returns does the public good and lets you wield your talent sounds like the best kind of portfolio to me. Now that you know, why aren’t you an angel?