On Angel Investing – and Karma
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One thing that always troubled me a little however was watching, as an outsider, the amazing success of technology companies. I was happy for the companies involved but kind of bummed that I hadn’t enjoyed the ride – not from a financial rewards perspective, but simply for the thrill of the race.
A couple of years ago I found the solution and began to actively invest in angel rounds for companies – since then I’ve been involved in startups in four countries, and different industries – but in their own wayConnect2Field, Cloudability, Appsecute and HybridLogic have given me a chance to experience the roller-coaster that is startup life.
most people who expect to make money as angel investors are fooling themselves
Rachleff pointed to some research from the Kauffman Foundation that, he suggested, indicated the returns for angel investors were paltry at best. This research, or more correctly his analysis of it was questioned in subsequent comments to the post but that is secondary to Rachleff’s main thrust which was to suggest some advice for those who invest. In his words:
- Assume you are going to lose all your money. Treat success as a complete surprise. Successful venture capital firms generate approximately 80 percent of their returns from less than 20 percent of their investments. The chances are high your angel investments will be losing bets.
- Don’t do it unless you are worth at least $1 million or earn at least $200,000 per year. The SEC requires these minimums for angel investors because it is the minimum regulators believe is necessary for an individual to withstand the loss of the investment.
- Take a portfolio approach. Whenever you invest in a risky asset class like startups, movies or new artists, you need to have a portfolio, because the law of small numbers will likely lead to a complete loss on your investments. Remember talent acquisitions, which represent the vast majority of successful angel investments, usually result in a loss for the investors. Try to build a portfolio of at least 15 companies.
- Limit the size of your angel portfolio to 10 percent of your investible assets. Even sophisticated institutions that have the financial wherewithal to take significant risk and have access to the premier venture funds tend to allocate no more than 5 percent to 10 percent of their portfolios to venture capital. You don’t have the staying power or the financial expertise of these endowments, so try to limit the size of your overall bet.
I came away from reading the post a little troubled – not least of all because I don’t comply with any of those metrics. I agree that quite potentially the angel investments that myself and others make will not provide a return – clearly that’s not the primary reason we do it. It seems to me that assigning a rigid, calculated and unemotional structure to one's angel-investing misses the point. The reason I’ve invested in companies isn’t because they fulfilled some formulaic process, rather it was because I believed in them. At some level there was a connection.
Let’s look at the thinking behind my investments to date:
- Connect2Field makes field service software. I used to be an electrician and know first hand how broken the processes for tradespeople are. Add to that the fact that CEO Steve Orenstein is an amazingly hard worker, has an innate understanding of what the company needs to do and, perhaps most importantly, is a truly decent person and you have a great fit.
- I first met the founders of Cloudability at the GigaOm Structure conference in 2011. They were part of the launch pad and I was super positive about what they were trying to do and the clarity of their vision. Having got to know the team better, I’ve been staggered at how well they’ve executed in 18 short months. Add to that the fact that they’re very generous to help out other entrepreneurs and, again, there seems like a good fit.
- Mark and Tyler are the founders of Appsecute and when first introduced to them I couldn’t believe that anyone in my city had even heard of Cloud Foundry let alone actually gone and built an amazing product on top of it – I love helping out New Zealand companies and Mark and Tyler have proven to be both focused and very open to advice – a rare combination.
- Jason Seats, MD of TechStars Cloud introduced me to Luke Marsden from HybridLogic. It’s still very early days for that investment but Luke strikes me as a smart guy and someone who is keen to listen, and to lead.
- I helped found LiveMigrate partly because I wanted to provide an easy way for SMBs to move away from painful desktop software products, but also because I really wanted to work closely with two amazing guys – Daniel Fowlie and Abhinav Keswani – the co-founders of Trineo. LiveMigrate may not set the world on fire but I’ve been closely involved with some smart people – that’s worth more than a zeros on my bank account
- Going back further my first ever investment was in Cactus – a manufacturer of outdoor equipment and apparel. 20 years later I still own roughly a third of the company – it’s not making me rich in financial terms, but I’m immensely proud of the fact that we make rock solid product and keep a bunch of skilled people gainfully employed
The common theme here is that I invest in ideas I believe in, and people who I have respect for. There’s no formula for that, it’s more from the heart than from the head. Potentially that might lessen the financial benefits my investments might bring. But if it means that I can work with smart, fun, passionate and above all, ethical entrepreneurs, then I’m OK with that.