Marianne Hudson, executive director of the Angel Capital Association (the trade association for angel investors in the US) wrote an article making the case for wealthy to consider becoming angel investors. Her full article (with her permission) appears below:
The other day I was listening to an entrepreneur pitch his company to a group of potential investors and it hit me how great it is to be an angel investor. I’m admittedly biased, but I think being an angel investor is one of the best things high net worth investors can do. Supporting great entrepreneurs is a real kick – and it can bring significant financial returns.
The rewards are many, assuming you can check yes to these basic caveats: Legally, you must have the wealth or income to be an accredited investor. Personally, you must be willing to lose your investment money, should have a portfolio strategy, and use good investment practices. This high risk, high reward kind of investing isn’t for everyone, but for every article I read encouraging people not to get into angel investing, I see more reasons to do it.
First, consider the potential financial returns. A study found that the overall return on 1,100 plus angel exits was 2.6 times the money in 3.5 years, or about 27% gross Internal Rate of Return. Not bad compared to other types of equity investments. Even so, it’s important to look into the details. More than 52% of those exits lost some or all of the investment and 7% provided nearly all of the returns. This means that angels need to start with a strategy to make multiple investments to minimize risk and increase the chance of good returns. Angels should also educate themselves on good angel investing processes via events, reading and networking with experienced angels.
Angel investing can also help diversify your overall investment portfolio. Ryan Feit, CEO of SeedInvest, put it this way: “Allocating 5% of your overall portfolio into angel investments can increase returns while lowering volatility. This is because early-stage, private companies generally have a low correlation with traditional asset classes, such as stocks and bonds. A recent SharesPost whitepaper concluded that allocating 5% to private growth companies could increase the returns of a traditional portfolio by 12%.”
While returns are the measuring stick for any kind of investment, investing in early-stage companies provides a whole set of additional, hard to find, personal rewards:
- Meet interesting people with fascinating ideas – Top entrepreneurs are the best communicators I’ve ever seen, getting across their technology or medical innovations in ways nearly anyone can understand while also explaining their business models very well. You can feel their tremendous passion and see how fast the wheels in their brains are going. Through angel investing I have also had the pleasure of meeting other investors. Often we have highly different backgrounds, yet we share a common core that builds great bonds, leading to long-lasting, true friendships. And let’s not forget the great food and beverages we enjoy as we analyze and debate our next investment.
- Support what you care about – Since angels decide which companies they want to invest in, they can put their own money in the kinds of businesses that are the most important to them. This might be industry sectors you have experience in, or entrepreneurs who are alumni of your university, or supporting a demographic you care about such as women entrepreneurs.
- Know you’re doing good – As Feit says, “Unlike any other type of investment, startup investing provides the opportunity to invest in innovation and to feel real ownership in the companies that you invest in. Every year, angel investments create thousands of revolutionary and life-changing technologies.” I’ve met so many angels who are also proud that the companies they invest in create new jobs.
- “Entrepreneurship without the responsibility” – Super Angel David S. Rose coined this phrase in his 2014 book“Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Startups.” Entrepreneurship is exciting. As I wrote a few years ago, one of my favorite angels has said how much he loved starting his very successful company and selling it for a great return, but he didn’t really enjoy the part in the middle—running and growing the company. As angel investors, we know that the responsibility for a company’s success lies with the CEO and we can enjoy being involved with the company without having the responsibility of leading “in the middle” to get to a great exit.
- Learn new skills – Angel investing offers something new for everyone. Learning new things like deal terms, the most effective way to mentor entrepreneurs, or how to be a good board director can be lots of fun. Sometimes gaining these skills can also lead investors on new life paths. For instance, one reason angel investing is attractive to women is because it’s a fast track to learning about being on boards of directors, getting board experience, and then leveraging this to become better candidates to serve on corporate boards.
- Apply current skills in new ways – Angel Barbara Clarke is an example of how an investor’s background can contribute to the angel process. As she told me recently, “Everyone on a due diligence team has their own unique expertise and experience. For example, angels with journalist backgrounds are good at research and interviewing. My background is management consulting, and I’ve found that I am comfortable with competitor and market analysis, even in industries and fields I am unfamiliar with.”
When you add the financial benefits with the personal perks, how can’t you make a case for angel investing? My advice? Continue to learn as much as you can about angel investing before diving in, but know up front that it is one of the best things you can ever do.