The last time I wrote this column before the holidays, I shared a few myths about angel investing — providing business capital for a startup company. Contrary to popular impressions from “Shark Tank,” angels are not rare creatures. Being an angel does not require millions of investable capital. It need not take years to build up a portfolio of investments; there are 12 live investment opportunities in VentureSouth groups today. And you don’t need to be an expert already to contribute to the group. At VentureSouth, we derive our strength from the diverse backgrounds of our members and run frequent educational events to make sure everyone can be an expert.
With this column, I’d like to address four other misconceptions we often hear when discussing angel investing with new audiences.
MYTH 1: You can’t make money on angel investment.
Reality: There is a widespread misunderstanding that angel investment is purely philanthropic — a way to create local economic development — or done just for leisure and you can’t make money doing it. This is just not true. Our groups are fully focused on making good investments and generating strong financial returns, and as people that run the groups we only really get paid when investments pay off. (Job creation, wealth generation, and economic development are the frosting on the angel cake.)
Angel investors nationally have made money from angel investing. The most recent studies from last year reported portfolio returns for investors over the last three decades of around 25 percent per year – at least as good as other “alternative asset” classes like private equity funds. Investors in our groups have made money investing locally too: Overall the 11 companies that we have exited successfully have generated a 60 percent annual rate of return.
MYTH 2: It costs too much to be an angel investor.
Reality: This can be true, but it doesn’t have to be. Finding investments, doing your due diligence, negotiating the deal, paying attorneys to create transaction documents, paying accountants for tax returns each year (a topical cost), and monitoring your investments costs time and money — and quite a lot of both if you do these things solo.
Doing these things through a group reduces the time cost (and some dollar cost as we can leverage economies of scale) in exchange for the group’s membership fee. If you invest efficiently, the cost of these investments is again no higher than other alternative assets. (The carried interest on our Palmetto Angel Fund, for example, was half the rate of a typical venture capital fund.) And that’s before the value from the networking, education, and the intellectual challenge of being part of a group of business and community leaders.
MYTH 3: It takes too long for angel investments to generate a return.
REALITY: Some investments do indeed take too long to grow sufficiently to generate an attractive return. Yet the average investment time for successful exits from the VentureSouth portfolio is only 1.6 years. If you deliberately target investments than can generate an early exit, sometimes you get it right and they do. You need patience to be an angel, but not the patience of a saint.
MYTH 4: There are not enough great deals in the Southeast to generate good returns.
REALITY: Reading the tech press focused on billion-dollar IPOs and Silicon Valley unicorns, you are probably aware that Southeastern companies do not feature prominently there. But that does not mean there are no great investments here; they are just different.
Though some of our companies may be on track for a $1 billion IPO, we generally aim for companies whose goal is be acquired for $20 million to $50 million (and perhaps, if things go very well, more). Thanks to the Southeast being good at business formation, a tradition of light(er) regulation, a gradual accumulation of entrepreneurial talent and experience, and an active small-cap M&A market, there are plenty of companies around the Carolinas that can, and do, follow this trajectory. And as there are not many people actively trying to invest in them, local angels can cherry-pick the most appealing.
Angel investors are not necessarily maverick billionaires and early-stage investing experts. And we are not philanthropists with infinite patience content to make mediocre investment returns from subpar companies. Angels are regular people investing in solid local companies — and making money doing it.
Top: Image by Waiting for the Word, via Flickr.