Quite often people who have successfully invested in the stock market believe they will be successful at investing in startups. That could be right! But it is important to be aware that it is an inherently different game. Startup investing requires a lot more patience, since you may not be able to exit for 5-10 years. When you select a company often there isn’t a lot of historical data to crunch yet. Judging the business and the terms is a highly skilled activity. Find out how to fit angel investing into an investment strategy based on the stock market.
Stock market investing vs. angel investing
When you’re investing in the stock market you’re usually either investing in the index, which means you have a passive strategy, or you’re actively picking stocks because you’re using information that makes you smarter than the market. A lot of research shows that, in the long term, buying the index is just about as good a strategy as you can have. Part of the charm of active stock picking is that people enjoy it, they enjoy the process of studying the price to earnings ratio, analysing the market with charting techniques, or collecting additional market information and taking a chance.
In some sense angel investing is almost an extreme form of stock picking. You’re not just picking the stock based on information, you’re also getting to know the management, influencing the strategy of the company, participating in future funding rounds over time, and being a part of the exit process. You’re not just picking the stock based on information, you are actually helping to create value in the underlying company.
What makes angel investing interesting?
It is said that airline pilots often fly a glider on the weekend. When airline pilot sits in a regular cockpit they are surrounded by systems and buttons. When that pilot spends the weekend in a gliding aeroplane with no controls and no engine, they can hear the birds when they fly by them. That’s real flying. Angel investing does for investors what flying a glider does for a pilot.
As an angel investor, you are dependent on your skills as a deal scout, networker, manager, advisor and negotiator. It tests your senses and skills, and it feels great when everything comes together. Angel investing requires emotional energy and intelligence from the investor constantly. We’re talking about the extreme side of high-risk, high-return investing, which lies even beyond private equity and venture capital.
If you know what you’re doing you can also make a lot more money than you can on a public stock index. But it’s going to take more time and more effort. If you consider that time and effort a source of energy, then you have a double gain.
Which stock market know-how can you apply to angel investing?
A typical active stock market investor, and also an index tracker investor, is an experienced business person. They can look at their own daytime business experience to see if they can add that to a company. Their own business network can also be an asset to the entrepreneur, who might be a lot younger or have a different network.
Another form of knowledge an investor can add is just looking at a company from a different perspective from the founder: Do we have an exit strategy? Are there skills missing from the founding team? Is the value going up? That additional perspective on the company doesn’t naturally come from an entrepreneur, because they see the company as their own creation. So there’s a win-win when an investor comes together with an entrepreneur.
What can be an issue for stock market investors when angel investing?
Remember our pilot-investor comparison? Well, angel investing is so much less autopilot. You can’t do startup investing on your app, you will have to read contracts from time to time, you’ll have to do your own due diligence, you’ll sometimes be short of information, and you may have to chase a CEO for updates. What you do, or don’t do, could affect the success of the startup.
Tip for stock market investors who want to invest in startups
One of the investment criteria that makes you decide whether to invest in a company or not, is whether you love that company and you want to be part of that innovative area. If you love it, it’s going to be a source of joy and interest to you every time you get a CEO update. That might be your best investment in the end.
Invest in the next generation of startups and support innovation by signing up at Leapfunder. Here you will find plenty of active angel investors and deals to start your early-stage investment career.
Join our network of startups & investors!