Would you want to be an angel investor?
With the show, Shark Tank, angel investing was brought to the masses. If you have never seen the show, you might be asking yourself what exactly is it? Let me explain.
Like the sharks on Shark Tank, an angel investor is usually a high net worth individual who funds startups in the early stages, often with their own money.
Many of these angels have been around the block and have accumulated valuable business skills that would be beneficial to most startups. Besides financial backing, angels also provide other types of support, including operations, marketing, brand awareness, accounting, and in the back office.
As an angel investor, what are the odds of success?
Mark Cuban has stated publicly that 25% of his investments on Shark Tank lose money. The reality for most angel investors is that number is much higher.
The reality is, only 1 of 10 startups funded by angel investors succeeds. That’s a 90% failure rate. Let’s be real, and I’m willing to bet dollars to donuts the sharks make more from their salaries on the show than from any investments they’ve made.
With such a high failure rate, why do angel investors do what they do? Many angel investors will nonchalantly respond because they can. It’s true.
Most have the financial means to throw $100,000 here, another $1 M there. Some are bored and have money to burn. Others love the thrill of the hunt – willing to take their lumps to snag the big one – like Google, Facebook, Amazon, etc.
Angel investors are nothing more than informed speculators. Many angels don’t have any more of a clue whether a startup will succeed than your everyday investor.
Unless you have money to burn, do you really want to invest like a shark?
- In addition to infusing capital, do you want to provide the support and infrastructure to support a venture with only a 10% chance of success?
- On top of all that, an exit can be hard to come by. Liquidity is a significant issue. By taking a founding equity stake in a startup, angels are usually with that startup for the long haul. Either until an exit through an IPO, merger, or acquisition or until liquidation or insolvency. It sounds like long, drawn-out, labor-intensive gambling.
What if you could achieve similar returns that sharks seek, but without all the headaches? Besides the money, you wouldn’t need to provide all of the extras, and an end would be in sight.
Angel investors don’t represent the vast majority of ultra-high-net-worth investors (“UHNWIs”) out there. Most UHNWIs take an opposite approach to their investing, preferring something more tangible and with better odds of success than the pure speculation of startup funding.
It’s not to say that UHNWIs don’t invest in startups; they invest in a different kind of startup – one that offers income.
The rich don’t speculate. The rich would prefer to focus on income-generating investments like:
- Commercial Real Estate
- Running a Business
- Private Equity with Income Component
- Private Lending
- Agricultural Interests
The wealthy prefer these income-generating investments because, over time, they provide higher risk-adjusted returns than their Wall Street counterparts. They also act as an inflation shield that is recession-resistant.
UHNWIs set their goals higher than the general investing public and have different priorities than angel investors.
The wealthy want to build wealth that lasts for generations with the knowledge that building wealth can be easily passed along.
The problem with angel investing is how do you pass on your instincts for choosing the right startups to the next generation? It’s difficult. Commercial real estate, on the other hand, can pass from generation to generation without the need to pass on much intellectual capital.
UHNWIs seek out income-generating investments because they know that only with compounding returns through reinvestment will they be able to achieve inter-generational wealth.
UHNWIs don’t want to provide the intellectual capital; they’re completely opposite. They want to rely on the expertise, infrastructure, and established operations teams of others.
They know they can achieve above-market returns without suffering brain damage by investing in private funds led by skilled, experienced, and competent management. Because most private funds have average target exits of 5-7 years, there is a defined exit.
You don’t want to invest like a shark; you want to invest like a UHNWI.
Invest in a fully operational team with accessible, transparent, and competent management. Angels are used to losing all their money. UHNWIs don’t even make it an option. Most of them are in an asset-backed investment with an income component.
Don’t invest like a shark.
Invest for income with a defined exit.
Invest for success,
Kent
