My Experience With Angel Investing

My experience with angel investing

Before I get backlash for angel investing in start-ups, you should know that 99% of my invest-able assets are in low-cost, index funds or real-estate.  That said, I’ve always been intrigued with alternative investments.

I watch a lot of shark tank. It’s nice to watch business owners present a good business model and get funded, but I’m more intrigued with the sharks. Wouldn’t it be nice to be the next Mark Cuban or Mr. Wonderful? Angel investing is a way to invest in small start up companies that have high growth potential.  It’s an area that I’m still experimenting.

What Is Angel Investing

According to Wikipedia, an angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an affluent (relative term) individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.

A small but increasing number of angel investors invest online through equity crowdfunding or organize themselves into angel groups or angel networks to share research and pool their investment capital, as well as to provide advice to their portfolio companies.

Statistics of Start-Up Companies

I know the statistics on the success rates of start-up companies.  According to an article in FastCompany, “Why Most Venture Backed Companies Fail,” 75 percent of venture-backed startups fail. This statistic is based on a Harvard Business School study by Shikhar Ghosh. In a study by Statistic Brain, Startup Business Failure Rate by Industry, the failure rate of all U.S. companies after five years was over 50 percent, and over 70 percent after 10 years.

So, why would I waste my hard-earned money for something with such a low probably of success?  Well, there are many reasons why 25% of start-ups succeed.

Why I Angel Invest

I’m willing to play the long-game by investing in low-cost index funds.  99% of my assets are invested in this class.  This strategy has a proven track record for success.  However, there are times when I wonder what it would be like to identify a really good company early in its life.

Imagine if you were one of the investors in Apple back in the 70’s before they went public.  Or imagine you were an investor right now in Uber.  Those “unicorns” are hard to find, but it’s fun to play the game.  Again, I would not recommend anyone play around in this area with more than 5% of their portfolio.

How I Angel Invest

I started investing on the Angel List platform about a year ago. You have to be an accredited investor in order to participate.  Much like real-estate crowdfunding, this platform allows me to “crowdfund” with other investors in start-up companies.  Since I don’t have the time or the knowledge to evaluate companies, I “syndicate” deals with a venture capital firm.  Venture capital firms have access to more capital, have specific expertise, and can also negotiate better terms than a private investor.  I pay a big commission for these benefits (20% carry), but its worth it if the deals are more successful.

I chose one firm because I like their investment philosophy, their access to deal flow, and competence of the leadership team.  They only do deals with companies who have strong management teams, are already generating revenue, demonstrate consistent revenue growth, companies that solve a pain point, that have a highly differentiated product, with reasonable valuations, scalable business model, low customer acquisition cost, cash in the bank, and capital efficient.

Another bonus is that the firm I work with always makes the founders of each company provide a monthly update so we can track progress.

Angel Investing Results

Since January 2017, I’ve invested small amounts across 9 companies.  One of the investments was a Series E round with a private company that is currently valued at $1.5 billion and will likely IPO at some point in the future.  Because of confidentiality agreements, I can’t tell you what specific companies I’m invested in, but I’ll outline how much I’ve invested and the returns.

So I’ve already realized a 45% return in 9 months of investing in a start-up.  Pretty decent return relative to the stock market. None of the companies have gone bankrupt either.  However, it’s still too early to tell draw any conclusions. Angel investing isn’t something that updates frequently.  When I have a major change in the investments (exit, IPO), I’ll write-up a new blog post.

Does anyone else have any experience with angel investing?

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  • This is legit “angel investing”. I dabbled with startup / pre-ipo investing via Microventures. Essentially it’s shares from employees who left the company or a funding round where microventures raises capital.

    I bought DocuSign, honest company, practice fusion and biobots (3D printing for human tissue)

    I plan on putting a similar post together about my experience but essentially made money on DocuSign which went public last month and lost money on practice fusion.

    • financeforthefamily

      Looking forward to your post! How did you decide to invest in those companies? I’m familiar with DocuSign and Honest. They’re good companies because they’re well known, but I don’t know the first thing about valuating companies.

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