Angel investing is a high risk equity (although sometimes convertible debt) investment undertaken by an individual (angel investor) or a group of angel investors (angel network) in early stage companies with the potential for high returns. Simply put, it’s a high risk investment with the carrot of high return.
However there is something more qualitative in nature that unites angel investors and motivates angel investing. Beyond the risk and lifecycle criteria of a company, angel investors enjoy helping young companies grow. As I have heard several angels admit, there are easier ways to make money than angel investing. So then is the appeal of nurturing a new business and its founders, watching it grow and hopefully blossom enough to balance the high risk?
As I compose this post from my brother’s organic farm, I can’t help but see some parallels. An angel investor is a farmer of sorts, the crop being companies. There can be quite a bit of hands-on work for the angel investor (although not all choose to participate so proactively) as the company cycles through its growing pains, just as a farmer tends his/her crops daily, each small attention increasing the likelihood of success.
The risk profile is not dissimilar, either. A farm can lose about a third of its crop every season due to a variety of reasons. The working formula of a ten company angel portoflio similiarily expects that at least 20% of its companies to fail, most go sideways, one or two return a modest yield and potentially one brings a 10x return. Unlike farming, however, my brother can literally eat his sideways performers. But as my back will tell you, the labor to output ratio is too depressing to calculate. Farming is a way of life, with virtually all waking hours devoted to it. Can successful angel investing be anything less?