Understand capital needs and find quality investments – TechCrunch

Why an angel investment? Angel investing has three main benefits if you work in the tech industry: financial, educational, and professional. The benefits most important to you will significantly shape your approach as an investor.

Everyone dreams of being a seed investor in companies like Google or Facebook, but the reality is that these companies are few and far between. Yet angel investing offers potential returns that can far exceed public markets. Over the past 11 years, I have invested in 120 private companies, mostly in the seed stage. Financially, the results were well above expectations. My first “fund”, the 23 companies I invested in from 2012-2014, had a value of 21.2x the total cash invested and an IRR of 48.6% as of May 31, 2022.

However, it is important to go into angel investing with realistic expectations for financial results. Most professional venture capitalists are considered top quartile if they have returns greater than a 3x return on invested capital over 10 years, and a 5x return would put you in the top 10%. It takes significant hubris to assume that you, as a new investor, would match these returns given the advantages that professional investors have.

Financial returns aren’t the only benefits of angel investing. Being an investor can also provide educational opportunities not available through other means. Firstly, angel investing gives you a front row seat not only for business formation, but also for the legal and financial process around private markets. For many operators who have only held technical positions, taking on the role of investor can be an eye-opening experience.

Second, most people stick to products and companies they understand well for professional roles, but this can be very limiting. As an angel investor, you have access to execute strategies, products and businesses that you may not be personally qualified to direct directly.

The root cause of most budding angel investors’ failure is not thinking clearly about how much money it will take to be successful in the long term.

Third, angel investing can have significant career benefits, especially if you work in the tech industry. As an angel investor, you have the opportunity to form new relationships, not only with the founders, but also with other investors and employees of the company. Every investment is a chance to build a new network, and networks of weak connections often open up surprisingly valuable new opportunities. These benefits accrue over time, as one investment often leads to others, and these new networks begin to overlap and reinforce each other.

More importantly, as an operator, seeing how other founders and teams represent their vision and implement it can help you improve your own capabilities. Most of us have limited experience in the roles and companies we have worked for directly. As an angel investor, you can increase this exposure by 10x to 100x.

How much can you afford to invest?

Unfortunately, the root cause of most budding angel investors’ failure is not thinking clearly about how much money it will take to be successful in the long term. More often than not, the fundamental problem that people do not take into account is the lack of liquidity of investments in private markets.

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