No Risk, No Reward
Why would anyone get into angel investing? Is angel investing just gambling?
Maybe.
Angel investing is simply the practice of investing money into companies at their earliest stages… when there is no public market for the stock you’re buying and no way to exit the investment that you just made for perhaps, 5-10 or more years.
Basically, you’re trying to get more money back than you put in and, in this case - for the additional risk of backing the riskiest companies - you’re looking for many, many times your money back.
Easy, right?
The fact is… angel investing is not easy. It’s not comfortable. It’s not predictable. It is challenging, difficult but can be immensely rewarding. But without taking the risk, you will - of course - never see the reward.
Traditionally, these risks were taken only by cadres of well-connected individual investors (most of them former tech execs, retired doctors and, more recently, celebrities) who would pour money into the buzziest start-ups that the ‘rest of us’ would only read about months (or years) after the investments were made, as a liquidity event was about to make the wealthy private investors even more wealthy.
The companies you’re investing in as an angel are typically anywhere from less than 1 year old to less than 5 years old and have little or no ‘traction’ (likely little or no revenue, maybe few, if any, customers, etc.).
These companies may very likely be nothing more than a few charismatic and energetic founders with great ideas and tons of energy.
The thing is, though, most angel deals are:
hard to find/get an opportunity to invest in;
impossible to accurately value;
unlikely to regularly (if ever) report progress
Most investors find it difficult enough to invest in the public markets, when companies are required to accurately and timely provide reporting for investors. Those same investors find it daunting… horrifying… imperceptible, even, to invest in start-ups with little/no history, opaque reporting and frequently shifting business models.
This is where AngelList comes in. AngelList completely changed the game for the small, non-institutional, angel investor… democratizing access (for the first time) to many of the best deals available, even among the ‘Sand Hill’ elite (the VCs most well known in the world for backing the largest tech winners.
AngelList makes it:
easier to find and gain access to quality deals (or ‘deal flow’);
easier to discover and vet valuation for deals;
easier to obtain information and access to companies
The fact is that very few people are well connected enough to get a sufficient volume of deal flow to make angel investing profitable. After all, most of the companies you will invest in will fail, completely, returning nothing to you. Still other companies you invest in will sell or shut down and return something more than nothing to you and - if you’re lucky, maybe all (or slightly more than all) of your invested capital.
It is the others that you look for… those companies that return 8x, 25x, 50x, 100x or even 1,000x your invested capital. Those outsized winners will cover all your losses and still leave you with substantial gains. After all, if you invest $5,000 and it returns 1,000x, you’ve just made $5,000,000 from your initial investment. Of course, there are a few public company investments that could return that kind of money (think: buying Amazon directly after the .com implosion at under $2/share, split adjusted, and holding until 2021 when the stock traded over $3,500/share). The fact is that investing at the earliest stages of a company (when it is valued at $5 million) and holding that investment until the company is worth $50 billion is actually a 10,000x return and could turn your $5,000 into $50 million. There are just very few opportunities like that outside of angel investing (and maybe, now, some crypto investing).
The great thing about start-up investing as an LP through AngelList is that you get access to some of the coolest companies that have ever been created and the incredibly bright and driven founders that launched them. Not only that, you may have the opportunity to help somewhere along the way (whether it’s testing an early product or introducing them to someone in your network). You don’t get that with crypto trading or public market investing.
Done correctly, though, angel investing - taking that risk - can yield immense rewards. Over the next weeks and months, we’re going to discuss how to put yourself in the best position to succeed - taking those risks - to earn those rewards. We’ll also discuss how AngelList - the most advanced and disruptive platform of its kind - can help you become a successful angel investor and grab your share of those rewards.
Stay tuned…