Recently, a post about why angel investors do not make money garnered plenty of interest. If you were an angel investor, you probably felt righteous indignation. You might have thought that is fine for some cushy VC making his 2% in annual management fees to say, but that you are doing just fine. You definitely will make money and show him who the smart investor is…someday…maybe…hopefully.
Investing in anything is no sure thing. When risk is involved, you can win or you can lose. The riskier the investment, the more upside there is, but that comes with an equal amount of downside. Even the best investors bet on stinkers from time to time. Saying that a Ron Conway fund returned 0% IRR is not some revelation, it is the nature of the game.
Most investors will not turn a positive rate of return on their investments. Case in point, look at venture capital returns over the past decade. Some investments will pan out, but that will be one or two investments out of a whole bunch that succeed. It is like a typical party conversation where some folks chat about how their stock portfolio is killing it. You might hear “I bought Apple at the low in 1997” or “I got in on the Google IPO” or some other permutation. But what you will not hear is that their 99 other stock holdings are complete dogs.
The same goes for startup investing, whether it is venture or angel. If your goal in angel investing is too make a killing, the only killing that is going to happen is to your ego. Investing in startups is hard enough when it is professionals working full-time, building massive deal flow, and being in the know about the industry and trends. For the novice or occasional investor however, it is downright impossible to accurately assess the value and worthiness of a deal.
Check your motivations when you think angel investing might be for you. Just because you have the means does not mean you have the right mindset going in. While you should not go in thinking you are some charity for startups, money should not be the core motivation. It may sound counter-intuitive when thinking of investments, but putting money first when startup investing generally leads to unsatisfactory returns.
Restating it in another way, the focus on money is not in one’s best interests as it becomes counter-productive to finding the best deals. When money is the core motivator, you obsess over deal terms and ownership, you chase deals that look “in the money” and your advice to entrepreneurs becomes focused on short-term results and quick exits. Your judgment and advice becomes suspect as entrepreneurs come to distrust you. In turn, it negatively impacts your deal flow as the best entrepreneurs and best startups avoid you. You get cut out of good deals. No one seeks you out.
There are many other reasons to angel invest that yield more satisfaction than simply money. People that have a passion for startups and entrepreneurs, folks that want to pay it forward, or those that want to change the world with disruptive ideas. The motivation is focused on the people and the ideas. The emphasis is on helping entrepreneurs and giving them a leg up in the world to give their ideas a chance. When the attitude is more about giving rather than taking, it creates a healthier, more productive, and more transparent startup community.
Earlier, I posted the following quote:
The key role of early investors is not funding, but personal attention and guidance…
That is what early startups need most. The funding certainly helps, but entrepreneurs need people that have the passion and knowledge and commitment to help them turn an idea into reality. What they do not need is mind games and endless rounds of deal negotiations, which are time consuming and distracting. Some of that is necessary to make sure the deal is fair for all sides, but there comes a point when it becomes unproductive.
Do not get discouraged by people telling you that you should not invest or that you will lose all your money. The startup ecosystem works well because there are investors of all types and levels that create a market for innovation to thrive. VCs need angels as much as angels need VCs, and in doing so, some of those investments eventually work out. However, invest in startups for better reasons than simply because it is something “cool” or you think you can flip startups like you flipped houses in 2007. Invest in startups because you can and want to help in more ways than your checkbook.
This article was originally published on Strong Opinions, a blog by Birch Ventures for the NYC tech startup community.
Image Credit: CC by Angels Den