Long-term angel investing: Understanding capital requirements and how to find quality investments

Why angel invest? There are three primary benefits to angel investing if you work in the technology industry: financial, educational and professional. Which benefits are most important to you will dramatically shape your approach as an investor.

Everyone dreams of being a seed investor in companies like Google or Facebook, but the reality is that these companies are few and far between. Still, angel investing does offer the potential for returns that can greatly exceed public markets. Over the last 11 years, I have invested in 120 private companies, mostly at seed stage. Financially, the results have been far above expectations. My first “fund,” the 23 companies that I invested in from 2012 to 2014, had a value of 21.2x total cash invested, and an IRR of 48.6% as of May 31, 2022.

However, it is important to go into angel investing with realistic expectations for financial results. Most professional venture capitalists are considered top quartile if they have returns that exceed a return of 3x invested capital over 10 years, and a 5x return would put you in the top 10%. It takes significant hubris to assume that you, as a new investor, would match those returns given the advantages professional investors have.

Financial returns are not the only benefits of angel investing. Being an investor can also offer educational opportunities not available through any other means. First, angel investing gives you a front-row seat to not only company formation but also the legal and financial process around private markets. For many operators who have only held technical positions, taking on the role of an investor can be an eye-opening experience.

Second, most people stick to products and businesses that they understand well for the professional roles, but this can be very limiting. As an angel investor, you get access to seeing the execution of strategies, products and businesses that you might personally be unqualified to lead directly.

The root cause of failure for most aspiring angel investors is not thinking clearly about how much money it will take to be successful in the long term.

Third, there can be significant career benefits to angel investing, particularly if you work within the technology industry. As an angel investor, you have the opportunity to build new relationships, not only with the founders, but also with the other investors and employees of the company. Every investment is a chance to build a new network, and networks of weak connections often open up surprisingly valuable new opportunities. These benefits compound over time, as one investment often leads to others, and these new networks begin to overlap and strengthen each other.

More importantly, as an operator, seeing how other founders and teams represent their vision and execute against it can help you improve your own capabilities. Most of us have limited experience from the roles and companies we have worked for directly. As an angel investor, you can increase that exposure by 10x to 100x.

How much can you afford to invest?

Unfortunately, the root cause of failure for most aspiring angel investors is not thinking clearly about how much money it will take to be successful in the long term. More often than not, the fundamental issue people fail to take into account is the lack of liquidity in private market investments.