2021 has been a boom year for technology capital raising, with a notable uptick in initial public offerings (IPOs), direct listings and special purpose acquisition companies (SPACs). A massive COVID-induced liquidity bubble has driven many private venture-backed companies to finally make it onto the public markets. Many of these companies have ridden the decade long mobile, cloud and SaaS wave as private companies. The wealth crystallisation from these public listings has been spectacular, especially for those angel investors who secured an early stake in the company.
Who’s winning the angel investing lottery
Many investors have won the angel investing lottery and continue to play the game. A couple of years ago, a hustling tech journalist Jason Calacanis crystalised more than $100 million from a $25,000 seed investment in Uber. With this 5,000x investment, he won the angel investing lottery! That’s life-changing money. JCal is now a prolific angel investor and on track to win the lottery again with investments in Robin Hood, Calm and others.
When a new blockbuster tech IPO is announced, I like to see who won the angel investment lottery. I use a resource like Crunchbase or Craft to find the seed or first-round angel investors, and some searching often tells a story. For example, this year, Gary Tan turned $300,000 into $680 million (2,000x) with a seed investment in Coinbase. Keith Rabois’ $380,000 investment in Airbnb was worth $600 million (1,500x) when it IPOed in late 2019.
The prized returns angel investors seek
As a fund manager in the 1990s, I remember everyone chasing Peter Lynch-inspired ten baggers. A 10x investment was a prized trophy back then. Angel investors are now hunting unicorns, which can return more than 30x. Many unicorns will return more than 100x, which is lottery territory. There are currently over 900 recorded unicorns, many of which are now preparing for the public markets. There will be many more lottery winners.
What exactly is angel investing?
So, what is angel investing? An angel investor provides capital for startup companies in exchange for some equity ownership. In many cases, angel investment is the first money after the entrepreneur’s personal capital, friends and family. Angels bridge the funding gap to venture capital which is the first institutional capital a startup company can access.
Angel investing is very risky. In most cases, an angel investor will lose some or all of their investment. For this reason, angel investing is typically limited to sophisticated investors (accredited investors in the US).
To manage this risk, angel investors typically build a portfolio. Although most investments will lose money, some will win, and the wins can more than cover all the losses. A key feature of angel investing is that every investment must aim to at least return 10x and perhaps have a chance to win the angel investing lottery. Angel investing is a numbers game.
Unlike state-run lotteries, angel investing can be positive-sum. With some discipline, management and a touch of luck, angel investors can reasonably achieve 20% to 30% annualised returns, and there is always the chance to make some life-changing money by winning the angel investment lottery.
In a near-zero interest rate world, the possibility of 20-30% returns has become very attractive if a sophisticated investor can stomach the risk. Angel investing may be an appropriate option for a modest percentage of net wealth as part of a broader portfolio strategy.
Current market trends driving angel investing
COVID has dramatically accelerated technology adoption since 2020. The financial success of technology companies has become more apparent with this year’s IPOs. The major tech stocks continue to lead the market and represent about a quarter of the S&P 500. These trends have provided an impetus to all technology companies.
Technology startups are the companies of the future. There are many of them in the current environment and they will be seeking lots of funding. With the increased supply of new companies and the increased demand from investors seeking returns, angel investing is emerging as an exciting asset class for sophisticated investors.
At its core, angel investing is really about playing to win the angel investing lottery, and in today’s market environment, the chances of winning are surprisingly good.
I will be writing more about angel investing and angel portfolio construction. If you want to know more, please subscribe to my newsletter!