Angel Investor, Joshua Maher, shared an article on LinkedIn that I thought it was very interesting, the article can be found (here). Joshua and I are part of a slack group where founders and investors meet to discuss startups, and I reached out to Joshua to talk about his article.
We exchanged some ideas and I decided to write a blog post to clarify and elaborate on my thoughts. Let’s start by what Joshua mentioned that captured my attention.
Joshua wrote on angels investors misnomers: “I like to build or turn around businesses so I am going to angel invest — whoa… slow down a little, try your hand at private equity — not angel investing. Unfortunately many angel investors think they will have deep hands on roles in the businesses they invest in. In some cases this is true, more often the involvement is from a mentorship point of view or from a connections point of view (connections to customers, partners, employees). The majority end up being very hands off though, most angel investors are relatively passive in their activities even though they do get regular updates and opportunities to provide feedback and make connections. If you really want to be operational, look harder at being an employee, consultant, or enter into a private equity relationship where you are buying a controlling stake for the purpose of operations. If you would rather provide assistance as needed and have something of value to offer on a couple hours a week basis, angel investing is suitable. If you want to be passive, build in a great portfolio management strategy such as investing in a curated (pre-screened) list of startups or following great investors into deals.”
Maybe I have a different idea of angel investing, due to the fact that I have been in the U.S. only a year and I approach the situation with a different mentality. Joshua stated that it is wrong to want to “build” and I completely disagree with that.
There are mainly two reasons why I disagree, but I understand this is the position that is actually the norm here in the states. First, I believe that if you are in angel investing you are actually in this game to see things being built that were not in this world before. If anyone is in angel investing for the money, then they should go play roulette and put all in on color. The odds are better.
As Jason Calacanis mentioned in his article, your odds at angel investing are 1/1538 ~ 0.065%. And the odds at roulette are 46.37%. I know, the returns are different. But at least in the roulette we know the possible returns and the odds are much better. So who ever is here just for the money is clearly, at least not making a rational decision.
We are not here for the odds of hitting a home run or a unicorn (at least not all of us). We are here to help build the future. Its not a right, but a privilege, that a founder lets you be part of their dream.
Joshua states: “If you would rather provide assistance as needed and have something of value to offer on a couple hours a week basis, angel investing is suitable.”
Couple hours a week
So there is a misconception about the concept “skin in the game”. Most Angels write about thinking that putting their own money (5–10%) and giving two hours per week is actually being “risky”. That’s straight up BS. Being Risky, is putting 10–40% of your net worth and 100% of your time. In the first case, if I lose my money I still have 90–95% of my net worth, how is that being risky?
You may call me irrational. But I thought real risk meant to actually have something to lose that can really affect you. 5–10% sounds like real estate investing.
Just because the power law return can (and will) make you lose your money doesn't mean you are risking your net worth. The investment itself is risky (startups) but you are not risking enough to call it “skin in the game”. One aspect is, absolute risk of an overall industry compared to others and another is, the relative risk you take compared to your assets.
The other thing is time. Everyone talks about “my time is my most important asset” and it’s partially true. But it’s not time itself but what you do with it. Eg: I put aside time for doing sports, can have a lot of value or minimal value, ex. I play tennis with my wife vs. going surfing (me time). Remember, time itself is not the asset but what we do with it, how we utilize it to gain the most meaning or generate the most value. If you are only spending 2hrs/week, you are risking nothing. I’m sitting on the toilet for longer than that every week (I might need to ingest more fiber). So, invest your time. Also, how do you expect to actually try to “beat” the power law, if you just take it for granted and do anything to “play” the game. You need to create an impact on the startup and founder, an impact that is large enough that it will transform, in the long term, the relationship where time will beat the power law (not money).
I’m glad that I’m not alone in this concept of building. One of the best VC’s in the history of this industry stated this a couple of weeks ago:
“Great Venture Capitalist cares more about the company than they do about their investment” Fred Wilson at Launch Festival 2015
At the solicitation by Jason Calacanis of unpacking the thought, Fred went on to explain:
“You can be an investor and be interested in the financial investment you make, I paid a $1 dollar and I’m gonna get out $10, or you can care “is this company becoming great”and those two things are often not the same thing. And I think great venture capitalists care about the latter and they believe that the former will take care of itself. So they are not focus on money, they are not focus on how much of the company they own, they are not focus on the financial metrics so much, they are not focus on that stuff they are focus on: strategy, product, management team, building a world class organization, you know, all those things. It’s the common thread most great investors in the venture business have. Because in the venture business you actually have the ability to impact your investment where as if you are a public market investor you normally don’t have that capability.”
How can you expect to make an impact on your investment when:
- You have no real skin in the game due to your investment being only 5% of your net worth, (easing your worries of losing your money).
- You don't put enough time and care into your startups to actually create an impact that will build a great organization.
To those out there trying to help founders, I encourage you to think of how much you really want to help build the startups and what are you willing to invest (time and money) in them. Do you really want to have “skin in the game”?
If you do. Then go ahead. Help Build. Take a real risk. Let’s try to build the future.
PS: If you like it please share it with other founders and hit the recommend button. Also tell me on Twitter , I’m @JDcarlu