Are you considering becoming a part-time angel investor or curious what it’s like? I’ve invested in five startups, three of which were pre-revenue when I got involved. The following table offers some information about my portfolio.
|Company||Year I invested||Revenue the year I invested||My ownership||Estimated 2016 revenue||Estimated 2016 growth|
Here are 13 observations about my investments that may help your own journey in becoming an angel investor:
- I mostly own “life–growth” businesses: Life-growth businesses are lifestyle companies whose founders aspire to grow at a solid clip, often 25 percent or more. But life-growth founders reduce their stress by choosing not to work or ask their employees to work 70 hours a week. They typically don’t raise professional growth capital in order to grow exponentially; they’re fine with having a great business, fun lives outside of work, and just trying every day to get better. They’re driven, but just not over-the-top driven. I’m totally cool with that.
- My return on investment is cloudy, but looks pretty good on paper: Basically, these are illiquid investments that rarely return cash back to me. But if I compare the amount I’ve invested versus what the businesses are worth on paper today, my unrealized ROI per annum averages 47 percent. However, I have to make important assumptions to arrive at that ROI percentage (e.g., that the businesses are worth 2.5 times revenue; that businesses sell today for cash).
- I’m chasing after dividends, not necessarily exits: One or more of the firms I’ve invested in may one day sell out for a bunch of money, but as I stated last month in my blog post, now that the founders are drawing larger salaries, I plan to begin collecting larger dividends to get a return on my investment of money and time.
- I’ve made a number of mistakes: Next week, I plan to write a blog about the missteps I’ve taken as an angel investor, but here are a few previews… 1) I have tried to cram processes and methods that have worked at one business into another business. 2) I haven’t always been such a great listener. 3) I’ve occasionally communicated directly with employees instead of channeling it through the founder. 4) In the beginning, I didn’t realize follow-on investments were common and necessary. And I have other lessons-learned to share…trust me.
- Investing is a bit of a grind: Investor George Soros once said, “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” I’m not sure I’d classify good investing as boring, but it is hard work and a grind. I’m working with five founders, all of whom have their own unique, difficult challenges to overcome.
- Professional investors would categorize my companies as “still trying to figure out their business models”: Professional angel investors wouldn’t be too pleased if after six years, one of their businesses’ revenue was only $1.5 million. But I’m cool with that track record since I’m investing my own money and not doing it for a living. I believe in hockey stick revenue growth, so I’m confident most of their revenues are headed to $5 million much faster than they got from $0 to $1.5 million.
- One or more of the companies I’ve invested in could “break out”: My companies’ revenues may appear small, but they have decent-sized markets (i.e., $30 million or more) with little competition. One challenge is that most of them offer “nice-to-have” products instead of “must-have” products. Nonetheless, one could easily become hot and grow to $10 or $20 million without raising additional capital. If and when that occurs, my overall portfolio will do really well!
- I’m spread thin: The trouble with being a part-time angel investor is that you become distracted by lots of disparate challenges rather than one core challenge. Therefore, it’s difficult to have a big impact on any one thing. For part-timers like me, angel investing is more of an interesting distraction than it is a huge time commitment. So it’s difficult to do on a part-time basis and do really well monetarily.
- Growth becomes tougher as the denominator gets bigger: Another big challenge for these startups is that as their revenues become larger, they must figure out how to accelerate new sales faster in order to maintain the same growth rates. I’m involved in the “how do we grow new sales faster?” with each firm on a monthly basis.
- Follow-on investments are common: Three of the five firms have needed follow-on investments in order to survive and thrive. One wanted a follow-on investment, never got it, but figured out their business model anyway. The lesson there is sometimes having cash perpetuates flawed business models. Desperate founders often figure out challenges better than ones who are coasting.
- I like having a niche: I love Warren Buffett’s great quote, “Wide diversification is only required when investors do not understand what they are doing.” Most of my businesses sell information on a subscription basis to sales and marketing firms. The nice thing about investing in the same type of business is the expertise you gain. But I must admit: I’m getting ready to invest in two firms that I know little about – which is going to be exciting for me, but also chancy.
- Economic cycles can have a big impact: My portfolio has enjoyed five years without a recession. I’m not sure what will happen to these firms when the economy inevitably hits a wall for a few years. My best guess is that their revenues will slow somewhat, but time will tell.
- Working with five different vibes: I have discovered that each founder and company that I have invested with has their own personality and methods for going about things. I find it’s best to adapt to their styles – and try to help out as best as you can according to the founders’ desires.
The purpose of being a part-time angel investor might be best explained by Albert Einstein when he said, “Any fool can know. The point is to understand.” When you’re an angel investor, over a period of years, you learn to understand many different products and business models. What a blessing this learning journey has been.
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