If you are an investor with a risk appetite and love to tell investment stories at dinner parties, you might be a good candidate for Angel Investing.
So why choose Angel Investing over other forms of investment?
Angel investing is “for-profit philanthropy”, and “it’s cheaper and more fun than buying a yacht!” There is always the chance to win the angel investing lottery, leading to a lifetime of dinner table conversations. There are many reasons to become an angel investor.
Angel investing is mainly about money
Any activity that involves investing is primarily financial. Money, risk and return are central elements of investing. Angel investing is risky, but it is possible to achieve 20% to 30% annualised returns with a disciplined approach and a bit of luck.
Non-financial reasons to become an angel investor
More than a decade ago, several authors documented various non-financial motivations for why people become angel investors. These reasons still hold true today and include:
- “Giving back” to the entrepreneurial community that made them wealthy
- Participating in a startup without the full responsibility of an entrepreneur
- Mentoring young entrepreneurs on early-stage venture development
- Staving off the boredom of retirement
- Drinking from the “fountain of youth” by interacting with young and enthusiastic entrepreneurs
- “Impact investing” to commercialise socially beneficial technology (e.g. clean technology), and
- Generating “psychic income”, according to Wetzel
This quote from Van Osnabrugge and Robinson’s book on Angel Investing captures the essence of non-financial motivation: “I’m not in it for a fast buck. Besides, it’s cheaper and more fun than buying a yacht. I enjoy investing in companies and getting involved; it’s a real buzz.” Angel investing is fun if you can stomach the risk.
A window into the technology-led future
Technology is everywhere in today’s world, and keeping up with it is challenging for investors. Angel investors are well placed to identify and invest in the next generation of technology companies on the ground floor.
It is difficult for people to understand and plan for the consequences of exponential or compounding growth. “The greatest shortcoming of the human race is our inability to understand the exponential function”, said Albert Bartlett about the environmental costs of unrestrained population growth. And Albert Einstein said “Compound interest is the eighth wonder of the world”. “My wealth has come from a combination of living in America, some lucky genes, and compound interest” – Warren Buffet. The policy failures around managing COVID-19 infection rates is a recent example.
Moore’s Law is the most spectacular example of exponential growth in the last 50 years. And it is still alive. Using faster, smaller and cheaper chips (a second-order effect of Moore’s Law) is the foundation for all the central themes in technology: software, personal computers, the internet, broadband, social, e-commerce, mobile, cloud, SaaS, artificial intelligence, virtual reality, IoT, blockchain and more.
The third-order effects of Moore’s Law are applying these technology themes to the broader economy. It is the source of “disruption”. The second and third-order effects of Moore’s Law are also growing exponentially fast.
The combination of people’s inability to fully comprehend exponential growth, the second and third-order effects of Moore’s Law, and the observation that technology is already a massive part of our daily lives (and financial markets) raises some hard-to-answer questions
- How much more of our lives will be based on technology in 5 to 10 years?
- How large will the technology sector of financial markets become?
- Where will disruption strike next?
- Will software really eat the world, as Marc Andreeson forecast 10 years ago?
One answer is to look through the angel investing window. Angel investors see hundreds of pitches a year. They see entrepreneurs tackling old problems that the latest technology can now solve and new problems that technology is causing. Angels also see entirely new ideas and technologies that might solve tomorrow’s problems. Collectively, these pitches are a real-time status check on where we are on the exponential technology curve and where we might be in a few years.
Private capital markets are maturing
Another third-order effect is a massive shift in public versus private capital markets.
While technology stocks increasingly dominate publicly traded markets, it masks an equally significant trend. Startup technology companies have been staying private for longer for both capital markets and regulatory reasons. Private capital markets, including the venture and angel investing space, have matured substantially over the last decade. Investors waiting for companies to go public may be missing out on the bulk of the return.
At the same time, angel investing is being democratised. Crowding funding platforms are growing spectacularly. Becoming an angel investor has never been easier.
Angel investors don’t need to wait for technology companies to go public for exposure to one of this generation’s biggest wealth creation trends.
Angel investing offers a myriad of risks and returns for people who are up for the game. If you want to learn more about playing to win, I will be writing more about angel investing and angel portfolio construction in upcoming posts. Subscribe to my newsletter today so you don’t miss the next post.