Angel investing is a critical part of the high-impact startup world, particularly outside of the big venture capital centers. A good portion of Wisconsin startup success stories achieved liftoff with critical assistance from angel investors and their capital.
But, what about the angel investors themselves? How does angel investing work for them?
Well, you don’t have to look very hard to find blogs, books, and speakers extolling the virtues of angel investing for the angels. And a lot of them make a pretty good case that the angel investing community makes a nice profit for its efforts. A good case, but also a misleading case.
The hard truth about angel investing – for profit, at least – is that it is a lot like card counting as a way to make money playing Blackjack. It’s a sound proposition if the player/investor is bright, disciplined, and plays/invests in a lot of hands/deals.
Now, I’ll concede, for the sake of argument (even though it is inconsistent with my own observations over twenty plus years playing the game myself), that most angel investors are bright and disciplined. That still leaves one critical leg of this three-legged stool missing: diversification. The fact is, most angels are not sufficiently diversified – over time as well as just their aggregate number of deals – to reasonably plan on achieving “normal” angel investing returns. They are instead like card counters who only play a few hands now and again. As good as a particular counter might be, she/he can only expect to come out ahead of the house if she/he plays a lot of hands a lot of nights. Ditto angel investors seeking “normal” angel returns. You can only reasonably expect “average” returns in the business if you make a bunch of (smart, disciplined) investments in each of the several years of a typical business cycle.
Now, there is nothing really new here. Rather, I am prompted to post this reminder largely because we are on the cutting edge of a new form of angel investing: Crowdfunding by unaccredited investors.
Frankly, I have a lot of reasons to think this regulatory experiment is not going to end well. But that horse, so to speak, has already left the barn. We’ll see how far she/he runs. I just want to remind folks thinking of dabbling in the high-risk/reward startup space via crowdfunding that, no matter how smart and disciplined you are, if you don’t make a lot of investments throughout a full market cycle you should think of each investment as akin to a single hand of Blackjack – it’s a bet, not an investment.