I’m making a conscious decision to invest in fewer startups. Well, at least thinking about it. Am I worried about a tech bubble? Nope.
It’s far more fundamental than that …
To understand what’s going on, I need to share a story about my first angel investment.
I didn’t have a history of investing in anything other than real-estate (and, my own business) until I sold my business.
In fact, selling my business was the first M&A transaction that I was ever exposed to - until then, I lead a sheltered existence as a lone entrepreneur, I guess.
Actually, selling was the second M&A transaction, the first one that I was heavily involved in was a joint venture agreement in New Zealand, quickly followed by a much bigger one in the USA.
But, a few years later I sold my businesses to a UK listed company in a series of 4 transactions (two London stock exchange announcements during 2006, each with a separate earn-out agreement: 4 in total).
I then learned a lot about mergers & acquisitions, as I stayed on for a while to head up a key US division of my acquiring company as we embarked on a short-lived spending spree: I left the USA in 2008, amid the financial crisis which put a lid on M&A activity for us, and just about everybody else on the planet.
It was around then that, cashed up, I made my very first angel investment.
The founder was a serial entrepreneur with one exit already under his belt; the other founders were PhD’s at one of the best colleges in the country with a hot new (& patented) network performance monitoring technology in their hands; and, the market was every Fortune 1000 enterprise with a network i.e. ALL of them.
On the surface, it sounds like a well planned and executed investment: right people; right product; right market.
And the result was a 20x cash return after just 5 years (with upside still to come). What a way to start an angel investing career!
Still, the reality is far more banal: one of my close friends told me that he was getting back into the game and asked if I would like to invest in his first round.
Since he was a close friend, I said (virtually sight unseen): “sure”.
I didn’t read the docs, didn’t even know what a convertible note was, and I didn’t really understand the company or its technology.
But, he was - and is - a close friend and it all worked out.
Here’s the obvious problem: I was lucky.
So, now I know a bit more about startups and investing … and, I even read some of the legal docs that are thrown in front of me.
But, I need to slow down, because I’ve realised that I’m no smarter than any other investor, and nowhere near as smart as many.
At least 75% of startups really, truly, shouldn’t be funded … by anyone, under any circumstances.
How did I know that my friend’s company wasn’t one of those?
With every investment you make, no matter the criteria that you apply, there is one undeniable fact:
Fully half of all angel investments fail to return the angel investment made
And, most of the other half return ‘just’ 1x to 5x the angel’s money invested.
So, what is the real reason why I’m slowing down after having made a 20x cash return on my first ever angel investment?
Every now and then, you can get lucky or unlucky, but - over the long haul - you can’t fight the math …