Why Angel Investing is Better Than the Stock Market

If you needed a reminder of just how volatile the stock market can be, this was your week. The Dow dropped more than 3,500 points… It hasn’t seen a week that bad since 2008.

When the market takes a turn like that, many investors freak.

But in the midst of all the madness… I pulled the trigger on my next startup investment along with the other angels inside The Boardroom.

I say that not to brag or toot my horn, but rather to continue the conversation around the power of investing at the ground-level of tomorrow’s great startups.

Before you drop another dollar in the market…

 

Why Angel Investing is Better Than the Stock Market

 

If you’ve watched from the sidelines as big investors rake in profits from startup investing convinced that it could never be you, think again. 

The rise of Reg CF deals has paved the way for individual investors to break out of the limited returns that traditional asset classes such as the stock market have to offer and back startups in the early stages before VCs get their hands on these potential unicorns.

The name of the game is angel investing, and it’s never been as accessible to everyday investors as it is today.  

When done right, angel investing can deliver the types of returns not witnessed in traditional asset classes like the stock market. If you’re worried that you’re too late for the trend, don’t be. 

Besides, the global crowdfunding segment, which can be grouped into angel investing, was worth $10.2 billion in 2018 and is projected to balloon to more than $28 billion by 2025. As for angel investors… They pour $20 billion into tens of thousands of startups annually. 

There’s a good reason for it – unusually LARGE returns.   

If you ask Dave Rose, founder and executive chairman of Gust, a global SaaS platform for founding, operating, and investing in scalable, high-growth companies, the benefits of angel investing far outweigh those in the stock market. 

Rose responded to a question on Quora about whether angel investing startups yield a higher ROI than investing in publicly traded companies. And while his response was from 2015, it bears repeating:  

“Yes, when done correctly. The average annual return from investing in publicly traded companies is roughly 5%. The average annual return from an active, professionally managed, disciplined, long term, angel investment portfolio is roughly 25%.” 

In order to fully appreciate the appeal of angel investing, it’s helpful to compare it to the performance of a more traditional asset class such as equities. If there’s ever been a time to be skittish about the stock market, it’s now. 

The Dow Jones Industrial Average just suffered its single biggest-day point decline ever on Thursday, plummeting more than 1,000 points as fears of the coronavirus escalating to a pandemic spooked investors. 

If history is any indication, stocks will recover, eventually. But the sell-off is a stark reminder of how vulnerable the market is to uncertainty on the global stage. 

Given that the world is dealing with a deadly outbreak coupled with the fact that it’s an election year in the United States, the market swings are only likely to intensify in the short-term. 

The good news is that angel investing has only a low correlation to the stock market, so companies can provide a hedge to the volatility that runs rampant in equities.

 

 

Stock Market

 

For the average investor, the stock market is a roller coaster ride whose highs have a hard time justifying the lows. It’s not that you can’t find winners in the stock market. FAANG stocks (Facebook, Apple, Amazon, Netflix and Google’s Alphabet) have been carrying the S&P 500, but wouldn’t you rather be the investor to discover the next tech phenomenon through angel investing than buying in at these lofty levels? 

Even if you don’t back the next unicorn, knowing that you might is a rare opportunity. Besides, having the right mix of startups in your portfolio can still outpace equity returns.  

Historically, stock market barometer the S&P 500 delivers an average annual return on investment of 12%, according to Dave Ramsey (the data is somewhat more bullish vs. the aforementioned angel investor.) 

CNBC pegs the annual stock market return at 10% over the last 100 years. There is a one-in-six chance that in a one-year period, stocks will deliver returns that rival 25%, according to Moisand Fitzgerald Tamayo’s Charlie Fitzgerald cited by CNBC. 

Of course, there are anomalies within that data, but that’s why we say average yearly return. For instance, in the decade leading up to 2009, which is when the economy was rocked by 9/11 and the Great Recession, the S&P 500 delivered a return of -1%, for which the time period earned the nickname the “lost decade.” 

Now in a best-case scenario, a 12% ROI is fine if your only other alternative is a low-interest savings account. But with the rise of better asset classes such as angel investing, it’s not your only option. You’re welcome. 

 

The Risks & Rewards of Angel Investing 

 

Angel investing has a prestigious air to it. As an angel investor, you immediately become extremely popular among entrepreneurs for the possibility that you will back them and share invaluable advice. 

Of course, you hold the cards, which means you can pick and choose which startups and management teams are worth your money and time. Like any asset class, there are risks and rewards when it comes to angel investing – not every investment is going to be a winner. 

But when you hit with a portfolio company, it can be akin to striking gold. 

There have been plenty of blockbuster deals, such as Peter Thiel’s investment in Facebook, whose size increased 2,300 times before Mark Zuckerberg decided to IPO. 

And while backing the next tech phenomenon might take some practice, there are also successful startups that may have flown under the radar.   

  • Tower Paddle Boards. Mark Cuban poured $150,000 in this startup in 2012 for 30% of the company. Since then, the company’s sales have ballooned from $100,000 to $30 million, as of 2018. 
  • Flatiron Health launched back in 2012 as a tech startup dedicated to accelerating cancer research. After attracting the likes of Google Ventures in its first round, in addition to angel investors including the likes of David Tisch, Flatiron Health was scooped up by pharmaceutical giant Roche in a $1.9 billion deal.  
  • Surely you’ve heard of Shutterfly, but what about GrooveBook? The photo book app was featured on Shark Tank, attracting a $150,000 investment from Mark Cuban and Kevin O’Leary for licensing rights. The company has since been sold to Shutterfly for $14.5 million

 

So what are your chances of replicating some of those returns?

 

It’s tough to say exactly because no one knows what the future holds for any given startup. But if you follow some of the valuable pointers I shared here, you’ll have a greater chance of building a winning portfolio.

Speaking of a winning portfolio… you can increase your chances of hitting a whale of an investment by investing in multiple startups, rather than going all-in on one.

The most seasoned angel investors recommend having at least a dozen startup companies in your portfolio to increase the chances for successful exits. You can expect to stay invested in the company for an average of five years before hopefully experiencing a successful exit. 

But before you make that investment… regardless if it’s your first or your hundredth, make sure you’ve done your due diligence and have properly vetted the deal.

 

 


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