Above: The Intelligent Investor by Benjamin Graham. Can the intelligent investor of today afford to be without startups in their portfolio?
Think of a number. Any number you can think of (even a very big number) multiplied by one is always, and only ever, that original number you thought of. That’s it, ‘1x’.
And so it is with angel investing — if you decide to invest some money into a startup, no matter how much or how little, the maximum you can lose is 1x whatever you invested*.
The returns, or upside, can be virtually limitless but investing in startups is a risky thing to do and it’s more likely than not a startup will end up failing. The list of reasons a startup will fail is very long and many things are difficult, not least decision making. It is difficult to predict who or what will be successful, there is a lack of liquidity so it is difficult (if not impossible) to get any money back until the company exits (a sale or IPO) and most startup businesses fail so they never reach that exit point.
Is money the only thing an angel investor has at risk though? Absolutely not. As an angel investor you have to think carefully about other things that may be lost or damaged, either straight away or down the line. There are risks to your reputation, your ego, your pride. How you think about handling these risks before writing a cheque is as important as thinking about the potential loss of your hard earned cash.
Brilliantly Easy, Stupidly Difficult
I produced a podcast (released here earlier this year) all about making decisions. The point of that podcast was to show, through conversations with a Quaker businessman, an ex-SAS soldier, a foster carer, someone who gave his kidney away to a stranger and others, that decisions can be instant-no-brainer types (Brilliantly Easy) for decisions that have huge implications but also incredibly arduous and time consuming (Stupidly Difficult) even for the most trivial of choices.
What if it fails?
If this company you are thinking of investing in fails, how will you feel? Hindsight is a wonderful thing and when a company fails the “Oh, it was obvious from the start…” brigade will appear. What if someone calls you stupid for having made the investment? Should you have known all along like they seemed to?
Not only should you think about your feelings in the immediate aftermath of a failure but also think about that failure in the future. Over the long term, how will a failure affect your relationships with the founders and the team? What will your friends and family think? We all have to take knock-backs in life — will this make you stronger?
But what if it succeeds?
What if you were like Mike Walsh or someone else in this article? Mike put $5,000 into Uber’s seed round (only his second ever investment). After a few years his share were worth over $24,000,000. If that happened to you some people might call you lucky, not smart. How would not getting any public credit for being successful make you feel?
What if you made an investment into a company doing something you knew was a bit socially unacceptable by your friends. You might not tell them, but what if the gambling/drugs/alcohol/sex company went big, exited, and you made a lot of money? Could you live with that? Would you lose friends? Would you try to keep it a secret?
So remember — you can only ever lose 1x your money. Of equal importance, however, is that there are more risks to consider than money alone. Your ego could get bruised, there could be shame, you might feel a bit daft and you might even lose a friend or two.
We can’t run experiments living parallel lives so if you’re considering angel investing get comfortable with the prospect of losing, failing and then having to bounce back.
All things considered, is it worth it? I think so.
[*There is, however, tax relief for UK tax payers — SEIS and EIS — more on that here.]
Over the course of the next few weeks I will be sharing more posts like this. You can subscribe to the written posts for free. If you become a paid subscriber (for $50 per year) you also get access to the weekly audio interviews I do with angel investors plus you get my mobile number so you can WhatsApp me anytime to continue the above, or similar, discussions.
This is not advice. If you are thinking about investing you should seek the advice of a suitably qualified independent advisor. #CapitalAtRisk