On October 30th, 2015, the Securities and Exchange Committee voted in favor of Title III of the JOBS Act (Jumpstart Our Business Startups). Title III would let non-accredited investors invest in startups.
An accredited investor is someone who has a net worth of at least a million dollars, excluding their primary residence, or income of at least $200,000 each of the last two years ($300k if you’re married). It’s a high bar.
In the last three years, I’ve invested in the six figures in various “angel” investments (for equity, convertible debt, hybrids of those) across around 10 companies. All in search of that sweet sweet passive income.
The number of straight equity deals (I give money, I get equity) is small (2).
One company returned the capital, with a small loss (10%), and one company is likely to be a complete loss. The rest are in good shape, making regular distributions or timely interest payments on the debt.
All in all, I’ve avoided tragedy. I’ve also lagged the S&P500 by a wide margin (not an accurate benchmark for this class of investments but that’s where the money would’ve been).
If I could, I’d avoid it completely. Here’s why.
You’re just gambling
My first ever investment was in a small biotechnology company in the midwest for a few thousand dollars.
My friend (let’s call him Frank) who introduced me to the idea, told me that it was gambling. Frank was betting on his friend (let’s call him Ernie), who was a very smart guy and academically qualified. Frank was investing in creating a personal hedge against Ernie’s success. If Ernie made millions off this company, Frank stood to earn tens of thousands. It was, in a way, built to celebrate losses and ensure Frank wouldn’t be jealous of his friend Ernie. Made sense.
Frank makes it very very clear this is gambling. What I would say later on is that it’s all gambling.
As an angel investor, you control nothing. Any semblance of influence you think you have is imaginary. Even if you have skills that can materially impact the success of the company, you’re not there every day. Execution trumps ideas every single time and while you can pour gasoline on a fire, you can’t start it. Or restart it if it goes out.
So you’re basically giving money, hoping for a payout, and you won’t even be able to reliably know how valuable your investment is.
So it’s like gambling. In the dark. Without the free drinks.
I can’t evaluate opportunities
I knew I was gambling when I went into the opportunities.
What I didn’t know was that I’m bad at evaluating them — I think I can understand the company, I think I can understand the market, but I don’t. You can’t understand it by reading a few papers, you have to be in the market. Or know people who are in the business who can look at it on your behalf.
The pros aim to get 1 unicorn, 3 that tread water, and 6 that crash to zero. And the pros have access I don’t. They have experts, deal flow, and other people’s money. In fact, it’s not far fetched to say that I only see the deals they pass on. Or, more likely, are too small for them.
So I’m gambling in a game I’m bad at! So far so good!
It’s illiquid… which sucks.
Tim Ferriss has mentioned, on numerous occasions, that he likes angel investing because it is illiquid. He knows his own emotions and knows that the temptation to sell a company when it’s down is too great, so he likes investing in companies where there’s no mark to market and he can’t sell easily. The investment manages his emotions.
I have no problem watching the stock market go down. In fact, I see it as a buying opportunity because I plan to hold for many years.
I bought a lot of dividend stocks that got beat up in the latest major downturn in late-2009 and 2010. They’re now up significantly, so even when there are big moves (like in early 2016 and previously during the Greek debt crisis), they’re still in the green and that mitigates the sense of panic somewhat.
It’s not fun
I don’t know why I got it into my head it’d be fun to angel invest. In reality, it’s no different than, say, crowdfunding real estate investing.
By definition, you give money and are quiet. It’s fun to see your investments in the wild, doing their thing, but you’re overpaying for that feeling of fun. 🙂
To be perfectly honest, I like that I can invest in the stock market, make money, and have no headaches. If a stock goes down, I have no one to be upset with. If a stock goes up, I still have people I can celebrate with. It’s nice and mechanical and I think that’s how I like it.
And if I really want to gamble, I can fly to Las Vegas and do it for far less than what would go into an angel investment.
If I want cashflow, and even if I’m just getting started, then I can drip in some real estate investing for under $1,000.
You still want to do it?
If I haven’t convinced you of the follies of angel investing, I can share a few ideas that might mitigate some of these factors. The best way is by drafting off the pros either in a fund or through a syndicate.
Buy into a fund or syndicate that does angel investing and live vicariously — check out AngelList and MicroVentures. Remember that you need to be an accredited investor (net worth $1mm+ or $200k annual income) and those funds will attempt to confirm this, usually by having you attest to being one under penalty of perjury.
A syndicate is where you invest with a lead investor (syndicate lead) and pay them a deal carry, or percentage of profits (15-25%). When you join a syndicate, you can choose whether or not to participate in a particular investment along with the lead. With a fund, you put in your cash and just watch passively.
In both cases, you are still gambling and you are still a poor evaluator of opportunities.
There are investment groups, which are essentially social groups with an investment component. They’re often good for networking purposes and getting better at evaluations. I’ve never joined one before, I’ve gone to a few meetings, and I can see how being involved with one would be a lot of fun.
Alternatively, if you want to angel invest to help a friend out, that’s fantastic. It’s like loaning money to family or friends, don’t expect to see it ever again. Don’t be upset if things don’t work out, mixing money and friendships is very difficult.
Have you angel invested? What are your thoughts on it?