Insight from Angels

CEP member Jerry Carlson has over 40 years of Angel Investing experience. We asked him what he’d say to companies and entrepreneurs pitching us their ideas:

Thanks for taking the time to present your business to us.  Angel investors are genuinely interested in supporting new businesses. We want to take risks with you, and want you to be successful. We know that most likely, you’ll fail. And that’s OK. Some will succeed. We hope you’re one of the 20% or so who do. We are positively disposed toward you; we can afford, are are willing, to take risks with you. In many cases, we have been in your shoes. We are a sympathetic, encouraging, friendly audience. You are presenting to your peers.

But. We are also serious investors; we expect a return on our investment that compensates us for the risk we are taking and the inevitable failures.  In most cases, anyway – some of us do this as a charitable enterprise. Most of us, though, want a return on our money.

As you develop your presentation, please consider the following: a personal, 40 year perspective on angel investing from one of the angels.

Investing in your business is an alternative to other investment choices I have.

I can invest in a market mirror fund, a mutual fund, or individual equities or other things like real estate. I have many alternatives- you are just one, and a risky one at that. I can even outsource my angel investing to a venture fund. Instead, I choose to make selective, thoughtful angel investments.

I do that considering my alternatives. To take one real world example, I have invested about $325,000 in a mutual fund, YACKX, over the past 10 years. YACKX has returned 14.45% on an annualized basis over those 10 years. My investment is worth over $600,000 today. My investment has been completely liquid and completely available as cash at all times since the first day I made the investment. At any time in the past 10 years, I could have sold it and bought something else.

THIS IS YOUR COMPETITION.  Rating services consider YACKX to be a ‘low risk” mutual fund vs the average mutual fund or equity. Other funds, equities, or alternatives (eg. real estate) are equally your competition. While the timing of liquidity varies, the returns (and risk) of these alternatives is well understood. I don’t expect your company to be a mutual fund; I DO expect a reward that compensates me for the risk I take.

Investing in YOUR company means that I am illiquid; I must wait for a buy-out, an IPO, or some other liquidity event. My money is not available until then. Further, I must consider the risk that YOUR company may fail; YACKX won’t fail (it invests in a large number of public companies)- it may lose money, but it won’t go broke. For that reason, I demand at least a 30% annualized IRR from you.

I also expect to hear a convincing story that leads me to believe that you will be bought or will have a successful public offering, in a reasonable — 5 years or so — time frame. OR will pay me a dividend and return my investment. While time mitigates risk in the equity markets, time INCREASES risk for angel investments. The further away your company is from a liquidity event the more likely it is that you will fail. A realistic timeline is essential; an optimistic one is fatal to credibility.

As you develop your presentation, remember that I am first and foremost an investor. I expect, indeed I demand, a return that compensates me for the risk I take. I won’t invest unless I understand HOW, WHEN, and HOW MUCH I will get back for my investment in your company.

If you can’t credibly answer those questions, you won’t get my money.