I disagree on the choice of benchmarks as they're not really comparable. A more comparable benchmark for angel investments in Internet / SW startups would be a broad-based ETF that covers those. Picking a couple of the larger ones, I looked at the same periods (2012-2019 and 2016-2019) for each of them:
Not much different than QQQ's 3.04x, but SPY is not a good benchmark due to big differences in underlying constituents.
I'd want to get a better handle on the timing of investments as well to make the benchmark more comparable - e.g., if 50% of the capital was deployed in 2012 (hypothetically) and 10% in each of the following 5 years then I'd weight my benchmark performance in the same fashion.
Finally, I would want to discount the angel investment portfolio for lack of control and liquidity. Much depends on the specifics of the recent fundraising - is the valuation using the pref figure or is it a reasonable approximation of the valuation of the seed paper (adjusting for structural differences)?
Personally, I'd rather have a well-diversified liquid ETF return of X than a portfolio of illiquid minority stakes that are marked to 1.2X. At 2X, I'd be happy with the restrictions.
Please don't misinterpret this as dumping on the result - IMO I believe this to be an above-average outcome and I congratulate the author on their success. Angel is harder than most if the top-few % of investments are not in a portfolio.
I am also curious how many hours this individual put into the investing. I put about two or three hours a year into my investments in VTSAX and VTIAX -- just rebalancing. I would expect given the nature of angel investing that this person put in a good deal more work.
Let's say the per company deal size is $100k, and the excess risk adjusted returns are 2%. That means the deal would be worth about $2k extra to you, annually. (I'm counting your baseline investing effort as epsilon, so the deal gets no credit for returns matching my mutual funds.) Suppose your daily rate is $2k/day. You'd want to spend no more than a work day on this deal, per year, over the life of the investment.
If the amounts are smaller, or the excess risk adjusted returns are lower, then you'd want to spend less time per deal. This calculus also only applies if you have enough money to roll the dice enough times for the risk to even out. If you only have a million to invest, you'd only be able to do ten deals this size. Perhaps your hourly rate is lower, so you haven't accumulated as much of a warchest. In that kind of situation, you might be willing to work more for the same absolute amount of excess returns, but your risk would also be higher. So your risk-adjusted excess returns might shrink to a negative value.
Of course, you can tweak all the variables as suits you, and also there's the possibility that you are person who just enjoys angel investing, the feeling of importance that comes with hob-nobbing with the who's-who, etc. If that's so, then you could view the work as the price of entry, to the extent that it underperforms ordinary investments.
QQQ is also up 50% in the past 12 months, which skews the benchmark. TQQ is up 120% and if you called the bull run in 2012, TQQ would have you up 46x.
That and anybody with ~$1000 can buy into an ETF. Angel investing not only requires more capital but social connections and the prestige of something like a big Facebook exit. There are some funds and things like Forge Global where you can get access without a nice headshot, but otherwise you have to play golf with the founders and/or other investors.
So the SPY/QQQ benchmark does not realistically model the opportunity cost. It's not like angel investing is another tab in the Vanguard fund list where you can see where $10,000 will take you. Angel investing requires you to adopt a lifestyle.
So even if an average angel investor produces higher average returns than SPY, they might still have a lower Sharpe ratio, meaning the angel is taking on much more risk for only slightly higher returns.
For most investors it's hard to beat a broad market ETF for risk-adjusted returns.
Also the article doesn't calculate SPY total return.
Dividends-reinvested SPY is very different over long periods of time, I get ~3.46 (versus their 3.01) for the from-2012 calculation, which is a substantial improvement (and over only 8 years!).
Pure financial gains are only one aspect of angel investing though. The status and influence of being an angel investor does have its own value. Although I am not sure how you can capture that.
I kind of doubt that doing VC without being very high profile has better risk adjusted returns than SPY. Of course this somewhat hard to calculate on the VC side due to the lack of transparency and illiquidity of the market.
But in fact that author is going about this all wrong. It doesn't really matter if VC outperforms. The point of VC or hedge funds or any other alternative investments isn't to outperform the market on a risk adjusted basis (though that would be nice), but to provide a uncorrelated return stream.
When these uncorrelated or less correlated return streams is mixed into the standard market return stream, the risk adjusted return of the entire portfolio is enhanced. This is why you shouldn't focus on the individual risk/return profile of an asset or investment, but instead focus on the entire portfolio.
A great example of this somewhat counterintuitive statistical phenomenon is gold. Gold historically has had both high volatility and low returns. However, due to the low correlation to the market, mixing in gold to a SPY portfolio and performing a minimum variance optimization to determine the weights actually boosts the return/risk profile.
Equities in a given sector, whether public or private, tend to be highly correlated, but external observers just don't really get the full picture unless they dig into the specifics of the situation.
IME, private marks in aggregate are less volatile than equivalent public performance for a wide range of reasons, but that doesn't mean that a private manager can liquidate a portfolio company at an optimistic mark in a downcycle any more than the manager wouldn't be able to get a better price than the last mark in an upswing.
I think it's also worth clarifying for other readers that the risk you're talking about is volatility and has nothing to do with the actual fundamental risks of a given investment. Private equity (broadly defined) managers look to minimize risks in their investments, but they're talking about business and financing risks. I don't think I've ever heard a private equity manager ever talk about minimizing volatility and I'm ok with that.
> But in fact that author is going about this all wrong. It doesn't really matter if VC outperforms. The point of VC or hedge funds or any other alternative investments isn't too outperform the market on a risk adjusted basis (though that would be nice), but to provide a uncorrelated return stream.
This is correct, but it's pretty clear the the author isn't viewing angle investment in mere economic terms (which is an extremely sensible thing to do).
From the post: "When you invest in a startup, the money directly goes to the economy to build up a business, to create jobs and to actually contribute to the trickle down economy."
> From the post: "When you invest in a startup, the money directly goes to the economy to build up a business, to create jobs and to actually contribute to the trickle down economy."
and this is completely wrong.
The money public investors pay to exiting shareholders do play a major role in the economy - it enables the early, IPO/angel investors to exit, and allows them to convert capital locked in the established startups to new startups, without waiting to "cash-out" using the company's profits (which may be years away).
In other words, the public markets makes capital movement much more efficient. It lets high risk takers take on bigger risks (for the corresponding potential return), without taking up the required time.
It's a misconception that many people have, that investing in the public markets is less useful to the economy than direct investment. Both play a critical role, and without one or the other, the capital markets will be _way_ less efficient.
In the aggregate this may be true but the public markets don’t need any given investors. There are hundreds of thriving startups that simply would not exist today if ten people who did invest had chosen not to invest. No public company is that dependent on investors especially if they don’t need to make another offering.
> The money public investors pay to exiting shareholders do play a major role in the economy - it enables the early, IPO/angel investors to exit, and allows them to convert capital locked in the established startups to new startups, without waiting to "cash-out" using the company's profits (which may be years away).
Sure, this is true. But there aren't any early investors in Exxon (for example) cashing out this way.
> But there aren't any early investors in Exxon (for example) cashing out this way.
The process is continuous, until the day Exxon dies or closes shop. The chain of "cashing out" needs to be maintained for the chain to even exist in the first place.
If there were no "secondary" investors, then the only way for an initial investor to reap their returns is via the profits generated, which can be many many years away.
But these "secondary" investors are in the same position - they may want to only invest for a set interval of time. So they have to "cash out" by selling to "tertiary" investors. And so on.
And as a company becomes more mature, their expected returns are more certain, and also lower (i.e., lower risk). So the tertiary investors are people who don't want to take high risks, and want a steady stream of income.
The problem i have with a lot of people's misconception is that they think that buying/selling shares are useless activities, and does not benefit the overall economy.
I have been thinking about this a lot. The difference in preferences between classes of investors can be be huge. Pension funds and the like have massive amounts of capital and a constant demand for cashflows but relative low manpower, so they are looking for very stable investments. Angel investors are almost the opposite as they have much more "labor" available relative to their capital, so they are looking for speculative stocks where they can contribute knowledge and connections to make a difference. There is a whole spectrum of investors between these two and it makes sense for stocks to slowly migrate to being owned by the "boring" end as the underlying company matures.
I strongly disagree that using such methods to calculate a minimum variance optimization is a reasonable benchmark for portfolio performance. The issue is limited historic data is a very poor fit for future risks.
Looking at gold over the last say 2,000 years years shows a very bumpy ride with large long term negative returns. Stock data doesn’t have anything close to that kind of history, but looking at various historic stock markets again shows a lot more variety than simply reviewing a winner like the US stock market.
Essentially, with bad enough assumptions or data any calculation is meaningless.
I agree with this analysis. Anybody going off on Sharpe ratios has to extend that analysis to long tailed distributions, which venture investing certainly is. For example, if you do actually hit the Uber of companies, one early investor in Uber put in $5000 and reaped 20 million.
Also she literally says she performance isn't the most imporant, she wants to improve the economy rather than shuffle ownership of existing corporates.
> When you invest in a startup, the money directly goes to the economy to build up a business, to create jobs and to actually contribute to the trickle down economy. On the contrary, investing in the public market is simply buying stocks from other investors. The money doesn’t directly go into the economy.
> When you invest in a startup, the money directly goes to the economy to build up a business, to create jobs and to actually contribute to the trickle down economy. On the contrary, investing in the public market is simply buying stocks from other investors.
This was a very informative and well-written article, but it pains me to see this misconception.
Buying investments in the secondary market does not in any way "keep money out of the economy". Aggregate savings equals aggregate investment. Period. It's one of the most fundamental tenets of macroeconomics.[1]
How do we square that with what we actually see? Certainly it's the case that if you go out and buy 100 shares of Apple, it's not like Apple receives a check. Yet for every buyer there has to be a seller. If you buy 100 shares, the seller now has $120,000 of liquid cash to reinvest somewhere else.
That seller may then originate a new primary investment himself. Or he may turn around and make a secondary investment, in which case the next seller faces the same choice. He may even just park the cash in a bank, who will then use his reserves to make loans (primary investments) or buy securities (secondary investments).
But either way every secondary investment results in a net cash balance, that then has to be reinvested by the next party in the chain. No matter how long the chain is, the supply of secondary investments is fixed. Any new capital invested in the secondary market must result in new economic investment in some way or another.
One of the big advantages if you are investing in angel investments in the US is that all those returns up until $10M are tax free as part of the tax code. As a foreigner sadly you get none of those benefits tax breaks for high risk investments.
I'd be curious to know how much of an outcome a full-stack engineer at Facebook must have had in order to angel invest 400k a year and still have that be a fraction of their portfolio.
This is a pretty normal outcome for anyone at the FAANGs who stayed through at least one full vesting cycle and had the good sense to hold their RSUs for a decade after instead of cashing them out on vest.
I've noticed that in Silicon Valley, angel investing seems to have much more of a status aspect than elsewhere. Angel investors are "cool" and people will admire you during parties and whatnot. A FB engineer striking it big and starting to angel invest should be seen as a "nouveau riche buying status" move and not necessarily as a means to gain even more money (though that may be a welcome bonus of course).
The status aspect is largely missing in other areas of the world and may be one of the reasons why finding investment in SV is so much different than elsewhere.
The general rule is that you don't divest yourself of an asset unless you are going to buy another asset or make an investment that better serves your financial goals. Cash is just money, but equity will work for you 24/7/365 for as long as you let it. Everyone has different circumstances and preferences though, so there's no universal answer.
> It’s a bit hard to give one number for the returns as if they are factual. The reality is these investments are illiquid and it’s hard to pinpoint the exact outcome
She should be using the standard way funds (and angels) observe non-liquid valuations on a quarterly basis [1]
Briefly speaking, if the company hasn't raised any new funds in the last 12 months from 'sophisticated investors' (in which case the valuation is given), she must have used a proxy valuation, like enterprise/sales comparable.
Anyways, interesting that over half of her portfolio is still active, but in line with the overall market [2]
Slightly off-topic, but which trade platforms are trustworthy for buying stocks in pre-IPO companies? I see in this post that SharesPost appears to be legit. Any others?
Also curious to hear if anyone managed to make such a purchase in a US pre-IPO company without being US-based.
https://www.seedrs.com is one that's UK based. But read the terms -- they take a pretty hefty cut. I don't consider it worth while personally -- investing in public stocks is much more capital efficient.
"Clever googling" the revenue numbers and "probably reaching X" don't count as real numbers. This writeup is up-in-the-clouds optimistic. The 409a or any other speculative valuation also doesn't mean much. I'm behind the first part -- It's worth investing in real business and job growth, but I'd like to see more grounded and practical ROI calculations.
It's true these are estimates. But they don't seem unrealistic to me.
Take KiwiCo - I'd never heard of it. They raised $11.5M, and 2018 were profitable, debt free and making over $100M/year revenue[1]. That's high growth and profits (a great mix), so assuming she got in during that early round, a 30x return seems very achievable.
Interesting read. It does highlight though that this style of investing is very much dependent on hitting home runs and grand slams—-whereas you’re typical SPY investment is a series of steady base hits. All is well until you miss a few pitches, then the potential big upside flips to a big potential downside whereas base hit guy keeps truckin’ along.
Just like with hedge funds you tend to hear about the ones that did well, and not so much about the ones that lost their shirt. Also like hedge funds while there are a few recognized skilled investors for many others there’s not a whole lot of solid evidence that the “winner” investors were really smarter than the rest, just probably luckier. (Just under 50% of people betting black in roulette will double their money... that doesn’t make them good investors). Like hedge funds there are lots of, often untold, stories of people getting super lucky with returns, thinking they are “skilled” and then going out and losing a ton the next few times around.
From my stint working in the bay area, it seems like tons of older low level executives at tech companies (probably bringing in comparable income to staff engineers at FAANG) treat angel investing like golf. Most of the wealthy folks will do it at least once as a social activity, but most of them don't really know what they're doing.
Not sure how common but I know quite a few angel investors that have just been employees at tech companies. Most weren’t even at primarily FAANG companies. Realistically at least by SV income standards, it doesn’t take much to be an entry level angel investor.
Correction: an individual income - 200k/yr as of Oct-15, 2020 [1]
> Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year
Maybe for salary but not for TC. I suspect median TC in the bay area is close to $250,000 just because of how many people are earning $300k+ at public companies.
Seeing how there’s a lot of investment/maths inclined nerds on this thread I will (selfishly..) point out the one key point nobody seems to have picked up on yet: she talks about the importance of diversification.
Imho that it is the key differentiator between a well performing and atrocious angel portfolio.
The math is pretty well explained in this piece by Abe Othman of AngelList here: https://angel.co/blog/venture-returns - but the TLDR is: at earliest stage of venture your mean is infinite so making more bets (aka diversifying your portfolio) actually increases the average return. That’s probably why most angel investors do poorly - not enough cash/time/interest (or been told to “focus your portfolio”)
We (here comes the selfish part) apply this to B2B SaaS here: TinySeed.com/thesis
Fundamentally - the problem with replicating the angel investment success that the author has is - not many individual investors were early enough in Facebook to have funds to deploy at a scale where the math starts to work in your favor.
That's not the right way to think about. Diversification reduces volatility by a sqrt factor thus increasing absolute return due to reduced volatility drag and risk-adjusted return through the reduction in volatility.
>I am lumping companies into groups if they haven’t achieve at least 5X markup. I just don’t feel it’s the right thing to do to point out in public that a company lost or is likely to lose 100% of my investment. Loss is part of the game.
If "loss is part of the game" then why not list the companies they've invested in and lost? Especially if this is for "for transparency and accountability"...
Likely because some of these companies are still in business, but are struggling right now, or raising another round, or are in the process of finding a buyer.
> I also had no clue that KiwiCo could become so ubiquitous and my kids love them.
Bits like this read like an advertisement to me, especially since my child has tried Kiwi crates and we found them to be pretty awful value. Maybe they're fun if you're an investor and you get a whole bunch of them at no cost, but for 20 bucks each we'd rather buy Legos.
I would say I have mixed feelings about kiwi crates. The continual freshness of ideas is definitely appealing especially during pandemic. The durability of the toys is not ideal. I also recognize that they can't produce high quality toys at low cost on a SAAS model. I do think they are making some engaging content for my kids. I don't like overwhelming amount of toys at the house so we had to kill off our sub.
The figures assumed to be right, this demonstrates that with knowledge and skill you can drive to a very satisfactory outcome. 2013 to present is a 7 year investment timeline, and on a sustained normal investment return scale you'd expect it to be double-and-a-bit, he went to arguing 6x so he's ahead of the market.
But, thats also arguably a non-sustainable ROI longterm. Not that it doesn't happen, but that the luxury of being able to retain the risk side, for the large multiplier, is confined to a lucky few.
This is about the latent value of early-stage ideas, as opposed to the sustained value of enterprise which continues in role and is not game-changer forever (what is?) but becomes an industry: the Angel is not talking about industrial continued value, but about that initial rise of the curve.
And, since the angel can swoop away, they can confirm their inner sense by denying capital injection at the point it might have rescued things, to focus on something else: So in effect there is no neutral arbiter "was it right" -It simply is what it is.
FDN: 4.31x / 1.86x IGV: 4.41x / 2.27x overall mean: 3.2x
Not much different than QQQ's 3.04x, but SPY is not a good benchmark due to big differences in underlying constituents.
I'd want to get a better handle on the timing of investments as well to make the benchmark more comparable - e.g., if 50% of the capital was deployed in 2012 (hypothetically) and 10% in each of the following 5 years then I'd weight my benchmark performance in the same fashion.
Finally, I would want to discount the angel investment portfolio for lack of control and liquidity. Much depends on the specifics of the recent fundraising - is the valuation using the pref figure or is it a reasonable approximation of the valuation of the seed paper (adjusting for structural differences)?
Personally, I'd rather have a well-diversified liquid ETF return of X than a portfolio of illiquid minority stakes that are marked to 1.2X. At 2X, I'd be happy with the restrictions.
Please don't misinterpret this as dumping on the result - IMO I believe this to be an above-average outcome and I congratulate the author on their success. Angel is harder than most if the top-few % of investments are not in a portfolio.