Lost, here’s a combination of investing advice and life advice. The former has taught me a lot about the latter.
I've been doing Angel investing and alternate investment for about 13 years. During that time I've made about 3 dozen investment into about 2 dozen companies. I've also made three investments in angel "funds" which have invested in roughly 80 companies (with a lot of overlap). Overall Angel investing been quite profitable for me, but it is very important to point out why.
Of the 80 odd companies I've invested directly or via the funds, and ~200 companies that have made pitches before the Hawaii Angels, only one other has had close to that type of return. Including four that have appeared on Shark Tank
I dragged longtime [E-R.org] member @Nords into the Angel group about a year after I joined, and while he has invested in one medical company which has a huge potential, overall I believe he has lost money, because he passed on my big winner. It's not because I'm smarter than Doug and he certainly puts more effort into due diligence than I do. I just got lucky.
I’ve been in Hawaii Angels since late 2007 (when Clif invited me to that first fateful lunch). I’ve been on their screening committee since 2012 and I started volunteering at the Blue Startups accelerator in 2014. Today I’m winding down all of that... hopefully by 2025.
I’m away from my spreadsheet but I’ve invested about $425K in 12 startups (including the Blue Startups accelerator). Technically all of the shares are worthless since nobody will buy them. Realistically I have $30K of shares in a medtech which could pay back all of the invested money by 2021 and maybe as much as 10x profit... or it could flame out if the human trials don’t work out. I have $125K shares in a second medtech which might or might not survive, but will probably pay out at least $50K of my investment. I have $25K in a third medtech which will possibly return... $25K. (See my trend?) Blue Startups will probably return at least the $25K I’ve invested in it. I have shares in a couple of zombies which haven’t declared failure yet and should formally shut down but haven’t. I have $55K invested in a company run by a submarine veteran who makes amazing products but hasn’t found his ideal corporate customer yet... and might need a few more years.
Meanwhile I could have more than doubled that money in one of the nation’s greatest stock-market recoveries, but angel investments are an epic asset-allocation opportunity-cost problem.
I haven’t totally lost all of the other investments. Three of the “failures” were eligible for state income-tax credits of $75K, of which I’ve used about $40K so far. (Today some angel tax breaks can still be found in a few states.) I’ve invested $25K in a lawsuit which we won, and that $25K paid 12% APY over four years. I recovered about $5K of another $25K investment that shut down.
I’ve stopped investing in new startups (and this time I really mean it) and I’m only making my pro-rata investments in subsequent rounds of one surviving startup. It’ll take me another 5-10 years to wind down the surviving startups, although one of the zombies may never formally declare its end. The submarine vet is smart enough to know when he’s done, and I’m not investing more with him yet, but we’re still talking and occasionally surfing together.
My 3rd investment turned out to have a 12x cash return. Plus it is very likely to continue to generate a 12% return going forward, with a potential for a pretty huge upside. I also was one of my largest investments.
... because he passed on my big winner.
I think that by now I’ve had at least four opportunities to invest in this company. It’s not a classic angel investment because it pays dividends instead of capital gains, and its dividend stream is incredibly lumpy. (5% one quarter, 150% another quarter.) It has international political risk of such gnarly proportions that it can’t even be measured. It’s not clear to me that it will pay off for anyone else but the original few rounds of investors.
I like the founder a lot, and I’ve learned a tremendous amount from him. Every time I see the updated pitch I can appreciate the numbers but the political risk still makes it a big “Nope”. None of the founders have broken any laws, and the managing founder has the ethics to shut it down when the laws change, but nobody can predict when (“if”?) that’ll happen.
The advice on the risks you've gotten is good. It is a rich man's sport. You really need to make at least 20 investment to have shot at the 10x+ investment that will pay for all the losers. The typical minimum angel investment is $25K (sometimes you can get away with putting in only $10K) So 20x25K = $500K and if you want to keep your total Angel investing to 5% (also prudent advice) that implies a portfolio of $10 million plus. Now, I don't have $10 million, but I have a very healthy appetite for risk so now Angel and alternative investments are over 20% of my net worth.
But it is not all about the money. I love talking to young entrepreneurs and giving them my $.02 (about what's worth) on their business. It really helps me keep up on new technologies and trends, which is one of the few things I miss about not working and no longer being in Silicon Valley and you do feel like being part of something bigger than yourself.
I also love interacting with my fellow Angels, they are smart and successful (mostly men) and several have become friends. They've also given me great advice about finding a good accountant, and a good estate lawyer. Plus I've been exposed to other investment, like tax shelters, and commercial real estate that would have never found on my own.
I'm also convinced that becoming an Angel investor has made me a better overall investor, I'm now able to trade off investing the stock market vs real estate, vs alternative investment and I'm much more diversified than just depending on the stock and bond market.
Exactly.
I use the term “angel philanthropy”, although I’m taking capital losses instead of charitable deductions. I thought that I’d run my own revolving fund of angel investments, with old exits funding new startups. Well, that idea works well but I’m no longer willing to devote the time to it.
Over my last 17 years of military retirement, I’ve thoroughly explored my “brilliant investor” curiosity. I worked through all the stock-picking techniques and eventually came around to angel investing as the last and most difficult of the stock-picking systems.
When Clif invited me, I decided that I needed to thoroughly explore angel investing while I’m at the hypothetical peak of my cognition. I’d either get filthy eight-figure rich or, when I was 82 years old, I’d be totally immunized against the temptation of angel investing.
The second has happened. The first may happen too, but that’s no longer a goal. I’m working too hard at investing, I’d rather spend the time on other activities, and after this year I’m no longer paying my Hawaii Angels dues or attending meetings. The term is “fallen angel”.
Mechanically, you should make at least 20 investments of $25K each. You should also make another 10 investments in the subsequent rounds of the surviving startups. (“10 follow-on investments” means you’re doing really well, even if they’re all with just 2-3 startups.) You should also limit angel investing to 5%-10% of your asset allocation, or (at least) have an inflation-fighting annuity which pays your living expenses. (Like Social Security?) You’ll also need to pay annual dues and you might need to hire a CPA for the tax returns after your first angel investment has an exit. Good problem to pay for.
To speed up my learning, I volunteered for the Hawaii Angels screening committee. It ensures that you see every pitch a minimum of four times, and you also quickly learn whether the founders are coachable... or convinced that they’re the next Steve Jobs (or becoming the next Elizabeth Holmes). Clif knows that I’ve already resigned from the screening committee, although they’ve ignored my resignation e-mail for nearly a year.
I’ve also volunteered as Hawaii Angels’ “deal honcho” (lead investor) for every one of my investments. It requires extensive networking with the other investors (to coordinate the funds) and with the founders (to negotiate the term sheet). That takes a lot of meetings and e-mails (and maybe a contentious discussion or two). You get to see a lot of sausage being made, although some of it turns out to be yummy. When it’s not so yummy I remind myself that this is the learning experience I’ve been seeking. I’ve learned a lot. Today in Hawaii Angels, if you volunteer to be a deal honcho then you get a free collectible coffee cup. I’m ridiculously motivated by (and even a little competitive about) that coffee cup.
My primary angel-investing filter was taught to me by another angel:
1. “For this startup to survive, everything has to succeed.” I’ll pass.
2. “For this startup to die, everything has to fail.” I’ll probably invest.
I’ve added a third filter:
3. Can I get along with these founders for at least 10 years?
As Clif and Warren Buffett advise, don’t swing at pitches. Founders are fantastically charismatic, passionate, and credible. They have to be amazing and convincing sales people. Angel investors can see the opportunities like four-year-olds running loose in a candy store. To counteract that issue, I decided to spend five years on initial investments: two per year. When a founder’s pitch survived the due diligence, I had to decide whether I’d invest (in January?) or whether I should wait for another 20 pitches during the rest of the year.
Other educational experiences:
I’ve been on the boards of several startups. I’ve fired a founder (the board vote was unanimous), and we’re currently involved in the second lawsuit against the ex-founder. (This time it’s a felony.) I’ve had my faith in two other founders destroyed by their willingness to have their ethics suborned by sketchy legal advice. A fourth founder turned out to be charmingly idiotic and frequently irresponsible, and it took me a few years to figure that out. We’ve heard pitches from two criminals (one of them subsequently convicted) and an unindicted liar. I’m convinced that another founder is on the Asperger’s scale and perhaps autistic.
In other words, they’re human. The same qualities which help founders persevere to success can also set them up for Greek-tragedy failure. I’ve finally internalized that, and now I watch for it with every pitch.
My angel investments have become dues to an expensive (worthwhile!) peer-tutoring club. I’ve met a lot of very impressive people, and some of them have become my mentors. Most of them will be lifelong friends. (And yes, Clif is in all of these categories.) Today I’m a much better investor than I was in 2007. I’m thoroughly immunized. I’m a better human, although arguably there was plenty of room for improvement. I’m not sure what I’m going to do with my upgraded parts yet, let alone any money that may result from the surviving startups.
I’ve watched three angels and one founder die on the job (of typical causes). I’ve watched two widows try to figure out what the heck their spouses were doing with that money and what they should do with the shares. This is one of the reasons I’m winding down my investments.
“Exit” is a complicated term. You don’t just get a dumpster of cash parked in your driveway and then pay buckets of capital-gains taxes or move to Singapore. Instead there could be an acquisition by another startup using their shares (which you probably wouldn’t invest in anyway). There’s an acquisition by a corporation which has illiquid shares, like a penny stock. There’s being acquired by major companies for shares of their stock, which may be restricted from trading for a few months or may just be incredibly volatile. (One potential acquirer of one startup was GE, although it didn’t go through.) I’ve watched two startups go IPO and lose much of their value during the six-month lockup of angel investor’s shares. When my Blue Startups fund investment terminates in 2025, I’ll get shares of the surviving startups... which may or may not exit. There could be 10-20 survivors of that startup equivalent of an index fund.
I’ve learned that my fellow investors aren’t always after money. Some are “business angels” who already have enough wealth and are now mentoring founders and other angels. (Like me, they just can’t shut it off.) Some are successful founders or successful angel investors. (A couple are both.) Some are in the family business and their job is to invest that 5%-10% of the family’s multi-generational wealth into startups. One seems to invest just for the subsequent privilege of yelling at their founders, who are now probably regretting cashing those checks. Another is convinced that his founders are lazy slackers while a third just lost faith and wanted his money back. I’m pretty sure at least one of the latter two is in early-stage dementia, but I hope I’m wrong. (“Money makes you more of what you already are.”) Some are simply curious like me.
I’ve said many times in this forum that I’m willing to work at a job, but the dissatisfiers outnumber the satisfiers. In my case, a significant dissatisfier has become the commute to the meetings. It’s frequently led to rush-hour traffic (or poor-quality conference calls) and I’ve had enough of those. It’s not the only reason I’m becoming a fallen angel, but it’s a significant factor.
Another reason is that when you’re traveling 4-5 months per year, you miss a lot of angel meetings. I’m more interested in slow travel than in making more angel meetings.
So some advice.
#1 Don't do it alone. I'm not sure of what the fund your talking about involves. I'd highly recommend going to an Angel group meeting or two.
https://www.angelcapitalassociation.org/ has lots of resources about Angel Groups, as well as an annual meeting which is very interesting.
Other resources for finding Angel deals include AngelList.co and gust.com but nothing really takes the place of meeting face to face.
#2 Volunteer. Most groups have a number of committees that you can volunteer for you'll learn a lot from the experienced folks
#3 Don't be in a hurry to invest.
#4 Funds can be good but watch out for the fees. Most VC fund have a 2% annual expense ration plus they take 20% of the profits. I'm personally ok with the 20% of the profits but the 2% expense ratio really adds up.
Before you decide to even be an angel investor, I’d suggest reading the books “Fool’s Gold” and “The Illusions Of Entrepreneurship” by Scott Shane. There’s also a classic manual of angel investing titled... “Angel Investing” by Robert Robinson. All of them are older but they’re not distracted by the latest fads or philosophies.
I also recommend reading the website Venture Hacks (the advice may date to the mid-2000s but most of it is timeless). The same VH founders also created AngelList, which has more good advice. Read everything that Paul Graham writes— he’s a founder of Y Combinator, and two of his other cofounders are Robert Morris and Jessica Livingston. They’re all smart, experienced, and perceptive people who communicate very well, although admittedly Robert Morris was also convicted for unleashing the Internet’s first worm in 1988.
As Clif says, do not invest on your own. Join an angel group so that you have help with the due diligence. (Look up the Angel Capital Association, your local university’s accelerator, or search for the phrase “angel investor group” in your nearest city.) You need face-to-face meetings (2-3 per month is about right) and you may watch some startups for 18-24 months before you invest. Do not syndicate with AngelList or any other crowdsourcing websites until you’ve met the founders in person... and you should network with the other investors for their due diligence. If they won’t share info and opinions then you’ve just learned a lot about the people with whom you’ll have to get along.
As for me, I used to have an angel-investing problem but now I can afford it. After 17 years of retirement (despite active investing) I’m now confident that my assets will last me for the rest of my life (even if I lose all of my angel money). More importantly, I know that a Google-level exit will not change my lifestyle.
Ironically my angel-investing deal flow is better than ever. I’m getting unbelievable spam through a variety of sources. I’m regularly networking with other angels and military veterans to mentor their plans or to help figure out what investors want.
Here’s a life lesson: I’ve learned enough about all types of investing to now stop doing it. Every year I’ve traded less in our other investments, and over the next few years we’re moving to an asset allocation of ~75% in a total stock-market fund (VTI) and ~25% in Berkshire Hathaway “B” shares. We’re going to set it up at 75/25 and just let it run— no reinvesting or rebalancing. There’s no cash in that AA because we’ll have enough income from my military pension, VTI’s 1.8% dividend, and a little net income from our rental property. If we need a new roof then we’ll just sell shares and pay the capital gains taxes.
I joked about “angel philanthropy”, but there’s a lot to be said for giving someone $25K to create jobs and intellectual property and possibly inspire a new industry. Medtech saves lives, and cleantech can save the planet. It’s helped my spouse and I evolve our thinking on philanthropy, and eventually we’ll actually do something about it. I think there’s still a reason to invest in local foodbanks and homeless shelters, and I’ll still donate to organizations like AccesSurf. I don’t think I’ll ever invest in a single accelerator or fund, but we might donate a meaningful amount to some sort of college scholarship or entrepreneur/founder fund.
