Angel Investing … Maybe Not the Best Idea

Good morning, guys! Happy Friday!!

I have a confession to make. I’ve been a naughty investor. I just entered into a highly speculative, extremely risky, might-never-see-my-money-back-again kind of investment. It was only a modest amount (not gambling the whole farm or anything!), given to a start-up finance company I learned about recently.

The reason I’m telling you all this is to be transparent about *both* the smart and dumb places I put money and openly share the results over time. As a personal finance writer, I’m a big advocate for conservative and simple investment strategies (index funds, buy-and-hold real estate, etc) and I rarely venture outside of that stuff.

But sometimes curiosity gets the better of me… And sometimes when I get told NOT to do something over and over again –> it makes me want to try it even more! So, this is what’s happening and here is why I’m taking an unnecessary risk…

How Does Angel Investing Work?

Angel investing is when you give money to a business (typically a start-up or early stage company) in exchange for a piece of ownership in the company. It’s also referred to as seed investing or series A/B/C funding.

The idea is that if/when the business grows, so does your investment. Returns can be quite lucrative if a start-up is highly successful. Think of companies like Facebook and Uber…. People who invested in them at the very beginning are multi-millionaires now because of the wild success of the businesses they helped fund.

On the flip side, if the business fails or has no growth, your investment will be worth nothing. And since *most new businesses fail,* most angel investors lose their money. This is why it’s extremely risky and kind of like gambling.

My Angel Investing Experiment

The investment I made is with a start-up called LifeGoal Investments. They were one of the vendors I met at FinCon, and after researching them more and more I’ve become really impressed with the founders and vision.

LifeGoal builds and manages ETFs. Their mission is to help families and individual investors save for specific life goals by giving them low-risk funds to protect and grow their savings.

How do I know that this business will be wildly successful? 

Honestly, I don’t. This is a risky investment for me.

If there’s anything I’ve learned from my (very limited) private partnership experience and research, it’s that any business idea can look great on paper… It’s more about *who* the plan is executed by and *how* it’s rolled out that makes the biggest difference.

So for me, the team members who actually run the show and their competence is what I’m really putting money towards. They are the reason I’m willing to take the risk.

I’ll share more about this company over time (and any good/bad results that come from my funding) but for now, here is why angel investing is typically a bad idea for most people, as well as the potential upsides that could come out of it.

Downsides of Angel Investing

Here are some of the crappy things about angel investing and why I might never see my money back.

  • Most start-ups fail: Can’t argue with the facts… About 90% of businesses fail, for all types of reasons. Needless to say, I won’t be tracking this investment as an “asset” in my net worth sheet, as it could potentially be worth nothing.
  • Seed money is tied up for a looong time: Private partnerships are not liquid investments. The only way to get my money back is if the company starts turning a profit or is bought out by someone else later, which could take years or decades!
  • No control in the business: Most angel investors are Limited Partners, meaning they have no voting rights in what the company does or how money is spent. (Personally, this is OK with me. If I got involved in business decisions I would almost certainly screw it up. 😂)
  • Share dilution and lower- than-expected returns: As the business grows, it may need to take on many more investors, which can dilute your percentage of ownership.
  • The “unicorns” are already funded: Typically, the biggest and best start-ups are already plucked by Silicon Valley venture capital firms. Getting an invite to the best private parties requires connections and a lot of moolah.

And… there are probably 100 other reasons why angel investing is a bad idea that a novice like me doesn’t even know about yet. If things crash and burn with my investment, I’ll be sure to blog about all the lessons learned.

Is Angel Investing Worth It? (Potential Upsides of Investing in a Start-Up)

So, given all the reasons I shouldn’t invest in a start-up, why am I still doing it anyway?

  • High risk = high returns: If things go well and the business grows, I might make a decent little profit one day. (It’s way too early to tell in my scenario what type of multiple return I could get, but the potential is quite high and fun to think about!)
  • More opportunities, connections, and learning: Being a part of private deals like this exposes me to conversations I’ve never been a part of and people I wouldn’t have met otherwise. Watching things unfold behind the scenes is a huge learning experience for me — whether it’s successful or not.
  • Funding something I believe in: I’ll get into this more another time, but I honestly believe that LifeGoal Investments is ultimately helping people invest their money better and achieve big family purchase goals. I’m personally attached to this mission.
  • It’s kind of fun: I’m a curious money nerd who loves contracts and seeing how things work behind the scenes of businesses.

I should also note… the reason my wife and I felt OK investing at this stage in our life is because it’s not a huge percentage of our overall net worth. Some people recommend investing no more than 10% of your net worth in risky ventures — our amount is waaaaay less than this. So if things don’t work out, it won’t really impact our lifestyle at all. 🤞🤞🤞

*****

So there you have it. I did something really risky and might fall on my face publicly. Ah well, it wouldn’t be the first time.

Any of you ventured into angel investing? Anyone have experience with SeedInvest or AngelList? Care to share your results?

Have a great weekend and HAPPY HALLOWEEN!!!

Joel

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3 Comments

  1. Accidentally Retired October 29, 2021 at 11:31 AM

    As an entrepreneur, I always wanted to do some angel investing later in my career. Besides helping out startups get off the ground, it feels like a fun way to make money!

    But as I’ve gotten older and gotten to the FI, my risk tolerance is not there. I’d much rather sit back and relax with a majority of my assets in index funds.

    And any risky bets will be on myself right now. That’s why I recently bought a website, I’d rather be in direct control of the risk in ny portfolio.

    Maybe in the future I’ll be in such good financial shape that I can give more and angel invest for fun. But not yet!

    Reply
    1. Joel October 29, 2021 at 1:20 PM

      I love your hands-on approach AR! That’s how you crushed it and got to FI in the first place — by building a kick-ass business and investing in yourself! Are you taking on any angel investors for your new site? ;). Kidding. well, kind of… :)

      Reply
  2. Angie November 14, 2021 at 3:04 PM

    I think in Calacanis’s book about Angel Investing, how he does it is he builds up a full pipeline to invest in companies and makes it his full time job to do angel investing.

    But at like $25K a pop, and to invest in 200-300 companies before I bump into a great company/unicorn…I’m not quite there yet with my net worth to absorb that risk lol.

    But in reading his book, it does sound very fun to be able to talk about new ideas that can change the world to founders and to be able to take part in a movement that can possibly disrupt how we do things.

    Hope it works out!

    Reply

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