August 14, 2011

The business of being an angel investor

For the last several months my focus was on the substantial remodel of my home.  My living conditions were sub-optimal.  

However, yesterday was a return to active angel status.  From 9:30 am through 1:30 pm there were presentations from 5 different startups, all seeking help from the approximately two dozen angel investors in the room.  Each presentation has 5 parts: to start, a member gives a very brief intro, then the startup CEO presents his business for about 10 minutes, followed by a period of Q&A, after which the CEO is excused from the meeting and the members discuss the deal for a few minutes, and finally, the CEO is invited back to the meeting and given feedback, including a list of members would like to help.  To state the obvious, the pace is Fast!

I thoroughly enjoy these presentations and the quick feedback of the other angel investors.  There are some Very Intelligent people in the room, who have great business experience as well as technical expertise in diverse fields.     

It may seem like a fool's errand, because each company is likely doomed to failure, at least from an investment perspective.  If the odds of any company applying is 100 to 1 against them, and I could bear to see 5 propositions in 1 day, it would take 20 business days (about a month) to find a good investment.  That's 12 per year*, assuming not much time to enjoy life in general, so let's say 10 per year.  An average angel investor might expect a 1 in 10 success for any one startup in his portfolio.

But even that 1 in 1000 still has great odds against becoming a financial success.  Of 100 exits, there is a 50/50 chance of making a profit of any size.  And only a 1 in 100 chance of returning 100x.  So, if 1 in 100 startups return 100x, even then the best you can do is stay even.  Being an angel investor seems to be a sub-optimal career choice.

Therefore, there must be other reasons to be an angel investor.  What I look for in the value proposition is that it helps people.  If the startup is just in it to make money with a fast flip, I will probably pass on the deal.  But if it focuses strongly on helping people in some way, has a first class Team, good business model, barriers to entry... only then am I interested.


*Even if you could take the hectic pace of 12 investments in your first year as an angel investor, it is doubtful that the pace could be continued.  Startups need care and feeding for life; this reduces time to look at new investments.  

Note: An additional point not mentioned above is that it takes on average 5-8 years until exit.  Investors want a payday sooner rather than later, and what's good for the angels may not be good for the company and founders.  All these factors argue for considering another line of work!