We’re all investors, but we’re no angels
Dan Primack recently wrote a good piece on how hard angel investing is. You can find most of the full article here, but I have pulled out some key points below. It is mostly a re-hash of the Kauffman study in honor of the new general solicitation rules, but some of his points bear repeating: investing in start-ups is work. You may lose money. You will need to do due diligence. You will need to invest in a lot of companies to do well.
Many, many experienced angels can tell you that you can make money at, it but none will tell you it is easy or that it can be done by mouse-clicking on AngelList. Here’s more from Dan:
…Every time a company like Facebook or Twitter goes public, we hear stories about newly-minted billionaires who invested small amounts of money in the early days. And we get jealous…
…Some critics have argued that it will all end very badly, because con artists will prey on feeble-minded grandmothers. They are wrong. It will end very badly because investing in tech startups is extraordinarily difficult, no matter how honest the entrepreneurs…
…Just take a look at the top-level venture capital data, according to industry research firm Cambridge Associates. It shows that early-stage VC returns have lagged the Dow Jones Industrial Average for the one-year, three-year, five-year, and 10-year periods. Early-stage VC returns also have trailed the Russell 2000 for each of those periods and beat the S&P 500 at only the three-year mark. And those are investments being made by trained professionals who often manage billions of dollars for large institutions…
…Unfortunately, the [angel] numbers are even scarier. The most comprehensive angel data is from the Kauffman Foundation, which several years ago conducted what it called the Angel Investor Performance Project. It found that 39% of all angel investors lost money…
…A Boston-area investor named Sim Simeonov dug a bit deeper into the Kauffman data and found that 66% of angels lost money on first-round investments in tech startups (and a majority generated no return whatsoever). More important, he ran a mathematical simulation that showed that median returns varied greatly with portfolio size. Namely, the more investments, the better. Simeonov learned that with five portfolio companies, the median return was break-even. To double that, your best chances are to have 50 portfolio companies. To triple your money, the number of investments jumps to 150…
…There are, however, some caveats to volume angel investing. First, the Kauffman Foundation found that the time spent on due diligence was positively correlated to returns. So if you just hop on AngelList and invest willy-nilly, your odds of success decrease. And if you aren’t a professional investor, how do you find the time to properly vet 150 startups?…
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If you enjoyed this post, you might enjoy: Angel Group Screening Practices Data, Angel Group 2.0, How Do Investors Think About Risk?, Some Perspective on SEC Rule 506(c), and Fred Wilson: Leading vs Following.
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