Angel investing is becoming a topic of discussion around the state. Angels and entrepreneurs are the job creators in our country. The entrepreneur brings the ideas, technology, and business opportunity while the angels provide the capital and management experience and strategic thinking that help startups grow and prosper. Startups create more net new jobs than any other sector of the economy over time. Angels move our overall economy forward and we need more of them in Michigan.
According to census data there are about 100,000 households with over $3 million of net worth in our state. These are households which qualify to make investments in this asset class. Less than 1% do so. Why is that? There are many answers to that question starting with the fact this is very high risk investing and can be complicated for a novice. So let’s be positive and focus on the reasons you should be an angel.
You should always invest with an expectation that you will get a return. Putting that aside for a moment let’s review other reasons for being an angel.
- Stay engaged with the business world. By exploring the opportunities entrepreneurs bring, you will be exposed to myriad new ideas, products, and services that will change our lives. You’ll see what’s coming down the road in new products and product enhancements, how we will all connect with each other in the future, the new drug, and medical device that will make us healthier and live more active lives.
- Giving back is in the human DNA. In our hearts and souls, we want to help others and give back. One form of doing that is as a mentor. An angel can be a passive investor, but often, they are a mentor, consultant, connector, or board member for portfolio companies. They can be engaged with the growth of the business and the entrepreneur.
- There are many ways for us to communicate with others without actually meeting or talking. Angel investing should be a contact sport. Networking, face to face, is one of the great joys of being part of a group. I am always amazed how people meet each other for the first time and find they enjoy only two or three degrees of separation. They may have worked with or for the other person’s friend or family member. They may have actually done business with the other persons company but just never actually met. They could be related to the other as a second cousin or distant in-law. They might be a friend of a neighbor. Making new friends with common interests is always fun and rewarding.
- Contributing to the health of our economy: The best way to diversify our economy, create jobs, and improve the standard of living for all is to support our startups. You have heard of ‘economic gardening’, which means to focus incentives and investment on homegrown businesses. There is no garden if there aren’t healthy startups. They are the seeds that angels help plant, fertilize, and water.
Now let’s address the return challenge. We all have learned the past 10 years that there are no ‘safe’ investments. Even though the stock market always goes up over time, there are many years when it too loses money.
As every adviser will tell you, be diversified. Even though private investing in startups is diversification in your overall investment portfolio, you should also be diversified in this asset class. You don’t buy just one large cap public stock as equity investment, you shouldn’t buy into just one startup. Here are some core strategies for improving your odds for success based on research by the Angel Capital Association:
- Invest in at least 10 startups
- Join a group, preferably one that is managed
- Invest in what you know something about
- Perform diligence, don’t invest on the personality of the founder only
Some people are satisfied with getting just some of their money back. Their ‘return’ is from more esoteric things like those listed above as motivating factors. If you expect a return and do all the homework necessary then you should expect a high return for your high risk investment. But measure it based on your portfolio, not on each individual company. You will write-off some of your investments, but others will give you outsized returns that will more than make up for the loss. Remember these are not liquid investments. No telling when each company will return your capital, but generally it’s in the four to seven year time frame.
Angel investing is a meaningful way to make a tangible difference in the future prosperity of your local community. So if you are or know someone who is an Accredited Investor please consider investing directly in the future of your community.