If you’ve researched angel investing prior to reading this, you will know that it’s not for everyone. It carries significant risk and its not a parking bay for your children’s education fund. On the other side of that coin, young companies offer an attractive return on investment when chosen carefully and you only have to be right once according to famous angel investor Mark Cuban. But returns are not the only motivator for investors of the Jozi Angels network. In discussions with angels several elements became apparent.
Startups represent exciting investment opportunities. These companies tend to tackle challenges in new, innovative ways. Think of being part of the early Apple team with Steve Jobs and the Woz as they embarked on a journey that would change the world forever. By investing in startups you become part of the team, a partner in the business, you have a ringside seat to an exciting show! Working with young energetic people on a mission is contagious.
A lot of angels, do it partly because they enjoy the process. Working with passionate individuals who are creative, smart and driven. Exchanging knowledge through flows of communication. There is opportunity for founders of startups as well as angels to learn a great deal from one another.
In his book, David Rose talks about the benefits and perqs of investing in high growth companies. He gives an example of how he invested in a space startup that modifies space shuttles for commercial use. For his birthday he had the privilege of experience weightlessness at the outer-edge of our atmosphere. Angel investors get early access to products and services because of their investment. Testing next generation devices before they come on the market trumps most other dinner party tricks.
By investing in a startup, you become part of the team. That means you have control over your asset, more so than most other asset classes. When investing in a listed company, for example, your voice is only ever heard at shareholder meetings. Your impact at a startup could involve strategic matters such as brainstorming the rollout of a new product or making an introduction that opens doors. There’s a correlation between your input and a startup achieving its objectives. This means you’re able to de-risk your investment by helping in the building of the business.
Leveraging network & knowledge
As we gain experience we develop assets, like knowledge and networks, which we often don’t maximise. Angels call on these assets when assessing an investment opportunity and often invest because it’s a good fit. There's a synergy between investor and startup, together the whole is greater than the sum of the individual parts. On the other side of the same coin, investing in startups requires more than just capital. Angels get hands on involved. The journey is dependant on where the collective can take the business.
Other angels want to invest in companies that create a positive change socially or within the community. It is possible to help others and make money at the same time. This is called impact investing. Angels often adopt an altruistic approach and want to see others succeed. There’s a joy in giving back and then seeing others succeed because of your intervention.
Angel investing, when done right can offer significant returns. Studies in the United States show that these investments have outperformed other investment asset classes over the long run. The Angel Resource Institute at Willamette University (ARI) recently released results of a nine year study on angel investing and found that average returns resulted in a cash-on-cash multiple of 2.5x which equates to an internal rate of return of circa 22%.
The chart below is a graphic representation from another study which illustrates angel investment returns relative to other asset classes.
Here are some real life examples of angels who made the right investments:
Mike Markulla invested $ 250,000 into Apple;
Andy Bechtolsheim, co-founder of Sun Microsystems invested $ 100 000 into Google before its incorporation;
Peter Thiel invested $ 500,000 into FaceBook when it was valued at $5 million;
Jason Calacanis invested $ 25,000 into Uber when it was valued at $ 5 million. This in essence cemented him in to the angel hall of fame and prompted him to write a book.
Investors in the Jozi Angels network are advised to establish investment mandates and follow processes as well as investment best practices before agreeing any deals. The more work done up front the better the end result. More to come in future blogs.