Is angel investing only for the super wealthy?
THERE’S A PERVASIVE idea that angel investors are all billionaires. And it isn’t hard to see why: ask someone to name an angel investor and you’re likely to hear names like Ron Conway, Tina Sharkey or Peter Thiel. Even those less familiar with the world of angel investing might be able to name Ashton Kutcher, who has backed startups like Airbnb, or Justin Bieber, who put money into Spotify.
But the idea that angel investing is an exclusive activity and the preserve of the super-wealthy is worth investigating. Yes, angel investing comes with risk and yes, very rich people are better positioned to bear that risk, but regardless, that doesn’t necessarily mean angels are members of an elite club. David S. Rose, for example, writes in his book Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Start-ups that more people should become angel investors and that angel investing is “a legitimate part of an alternative asset class investment portfolio.” According to Rose, a “rational person can be an investor and not a gambler”, so long as potential investors don’t start pouring money into projects that they might need.
Others have pointed out that where many angel investors fall short has less to do with money and more to do with research. Speaking to the New York Times, a former commercial banker called John O. Huston described how he turned his hand to angel investing after growing bored in retirement, believing his ability to analyse risk would guarantee him some success. He didn’t do enough research, however, and his initial portfolio performed poorly.
Angel networks, meanwhile, provide a way of mitigating some risk. Not only does the initial investment come from a pool of money that naturally means you invest less that you would independently, but networks also combine the collective expertise of a number of people and make fewer demands on your time. A network, like any group, can also function as a mini-marketplace of ideas. Points of view can be exchanged with the goal of finding the best possible course of action, and by people who all have skin the game.
But even if anyone is technically eligible for angel investing so long as they have a surplus of cash, there are other factors that might, in effect, make them ineligible. Because such a huge volume of research is required to make shrewd investments and to be able provide the support that startups and entrepreneurs often require from their investors, potential angels need a lot of spare time and the energy to remain engaged. It’s partly for this reason that successful angel investors often have close ties to the industry in which they invest or relationships with people in that industry. According to Michael Tiedemann, chief investment officer at Tiedemann Wealth Management, “the risk is most people are not going to see the best deals unless you are really well connected in the industry.”
But maybe the best way to look at angel investing is not in terms of investment and return. For many angel investors – myself included – angel investing is about believing in a person or a person’s idea and then supporting them financially because you would like to see them succeed. It’s also about taking the things you’ve learned over your life and career and applying that knowledge in a way that benefits others. There’s a socially conscious element, too: an increasing number of women are entering the world of angel investing to support female entrepreneurs who have been denied funding by male investors.
Angel investing can be rewarding and, if it functions properly, mutually beneficial. But there is no template, and it’s likely that there won’t be one any time soon. That means risk, but also opportunity. If you have the time, the money and you’re willing to do the research and immerse yourself in your projects, there’s no reason why anyone with some extra cash can’t become a successful angel investor.