Savvy Investors Turn To Startups During Rocky Markets

Dear Angel Investor,

You don’t need a Ph.D. in economics to see that there’s a healthy amount of market uncertainty among investors this past week. 

The Dow rebounded yesterday, but are we totally back on track?  

And with global fears heightened around the spread of coronavirus and election season right around the corner here in the US, we could have choppy waters ahead yet.

What’s your plan?

You might not have known this, but some of today’s greatest companies (companies like AirBnB, Dropbox, Spotify, and ZocDoc) were pitching investors and raising capital during the market collapse of 2008/2009. 

Now I’m not saying that’s where we’re headed… What I’m saying, is if angel investment isn’t part of your wealth-building strategy… you’re missing out! 

 

Startups Give Stability During Rocky Markets

 

If you’re on the fence about angel investing, we get it. Not everybody has the fortitude to be part of this coveted investment community. It requires loads of patience and can sometimes be a lonely journey that doesn’t give you the immediate satisfaction you get with a lucky Bull Flag in the stock market. 

Keep in mind, however, that patience is a virtue. If you are willing to stick with it, angel investing can prove to be exponentially better than the stock market, the latter of which has recently proven by going crazy just how vulnerable it is to the latest whims of the mainstream headlines. That’s one less thing to worry about with angel investing. 

Unless you’ve been living under a rock, you’ve heard that the stock market just suffered its worst weekly decline since the financial crisis of 2008. If you’ve got more than half of your portfolio tied up in stocks, like many traditional financial advisors will recommend you do, no doubt you’ve experienced sticker shock of late as your savings shrunk. 

 

Stocks Hate Uncertainty 

 

Something to keep in mind about the stock market is it hates uncertainty. Unfortunately, we’re living in some of the most uncertain times in history. 

In 2020 alone, the stock market is facing a one-two punch of coronavirus fears and the unpredictable nature of an election year in the United States. Angel investors are inherently in it for the long-haul and therefore are less subject to the panic driving these stock market gyrations.

And while it’s true no risk, no reward, times like these are a stark reminder that there are other places to park your money than the stock market which can be even more lucrative, namely, angel investing. 

It might take some strategizing, and you’ve got to be willing to take the good with the bad. But with the right tools, you’ll be well on your way to returns that surpass that of the traditional financial markets. 

 

What’s Your End Game?

 

A recent study found that it’s just as important to consider your end game as it is to selectively choose which companies you’ll back. By taking the initiative to seek a startup with a viable exit strategy, and to help them execute that strategy, your returns may be more than two times higher. 

Dr. Botelho from University of East Anglia, one of the researchers from this study, stated, 

“Thinking at an early stage about an exit clearly pays off. If business angels want to be rewarded for the risks that they undertake in making early-stage investments they should adopt an exit-centric strategy.”

Keep in mind that while not every startup will pay off, those that do should compensate for the miscalculations. As we’ve discussed in previous posts, the average return for an angel investor is about 2.5 times your initial investment, which can be achieved in 3.5 years, though some investments could have a time horizon of as long as a decade till exit. Stocks could deliver returns of 10%-12% per year, but in a “lost decade” like the one earlier this century, it’s much worse. 

 

Lessons From the Last Financial Crisis 

 

That’s the beauty of angel investing – it’s proven to defy the odds even during the worst of times in the economy. Uber, for instance, made its maiden pitch deck in 2008, at the height of the financial crisis.

Other success stories that germinated during that era while Wall Street banks like Lehman Brothers were shutting their doors were AirBnB, Dropbox, and digital health startup ZocDoc

In fact, 2008 was a banner year for angel investors, with the number of investments holding steady vs. pre-financial crisis levels and 55,480 startups receiving funding. Israeli entrepreneur Yossi Vardi said at the time

“It’s beginning to remind me of 2001-2004. The money is getting scarce and the industry is afraid to make decisions. This is the best time for angels to invest. We can invest at the top of the deal flow. We don’t have the pressure to release money or show performance like a VC fund. You can use sober opinions. It will be more difficult to raise money now, but the opportunities are still there. There is still a desire to conquer the world.” 

Here are a couple of other startups that were getting ready to shine while the stock market was crashing back then. 

Smashburger 

No doubt you’ve either heard of or experienced Smashburger. But did you know that the company was founded just as signs of the subprime mortgage crisis were beginning to emerge in 2007? The savvy management team used the depressed real estate conditions to scoop up locations for its chain, and in 2015 the company sold a minority stake to Jollibee Foods for $134 million. Jollibee has since acquired the entire company. 

24Hr Home Care 

24Hr Home Care used a similar strategy in 2007-2008, buying up “office furniture and equipment at dirt cheap prices” when other companies were being shuttered, according to the company’s CEO David Allerby. A decade later in 2018, it was named one of the 5,000  “fastest-growing companies” by Inc. 

If startups performed this well in the 2008 era, how do you suppose they’ll do in the next financial crisis?

 

Wrapping Up

 

The beauty of investing in startups is that they’re not tied to the highs and lows of the stock market.

That’s because it’s even bigger factors, like behavioral shifts and emerging technologies, that determine when most startups succeed or fail.

Savvy investors know how to study and read the signs. And, if history is any indicator, volatile markets mean it’s primetime for startups.

Do you think it’s the right time to invest in early-stage companies? Leave a comment and let me know, I’d love to hear your thoughts! 


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