I’ve been getting a lot of questions about the impact the coronavirus will have on startups and angel investors, so I thought I would tackle the issue head-on in this essay.
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Giant disclaimer up top that (obviously) everyone’s safety and well-being is the most important thing right now. Full stop. However, everyone knows that the second and third-order effects of this pandemic will be the economy.
The economy means people’s jobs, and people’s jobs are how they provide food, shelter, medicine, education, and safety for their families.
We lose jobs and some people will lose their safety, be it in the form of housing, food or medicine — let alone the mental health crisis that can come from being unable to provide for yourself and family.
With that disclaimer out of the way, I want to talk about investing in startups, which is what drives the economy through job creation. I’m sure some snowflakes out there will try and cancel me for talking about investing in startups right now, but those same snowflakes will attempt to cancel me on their iPhone while on Twitter and getting their food delivered from DoorDash (aka startups backed by angel investors).
In this quick essay, I want to explain why I believe that NOW is the best time to start angel investing. I encourage you to do so intelligently, slowly and with a strategy, which I will also talk about here.
Background: The most important thing I’ve learned about investing in startups over the past decade is that your results will vary radically depending on when you started investing. I was very lucky to have started angel investing in 2008 during the Great Recession as a Scout for Sequoia Capital.
At that time the valuations for startups like Uber and Thumbtack were $10m — combined!
For the past couple of years, startups run by founders who aren’t qualified enough to make a cup of coffee for Travis and Marco were demanding $15m valuations for copycat ideas with anemic performance.
A hot market filled with easy money makes everyone think they should start a company — which is completely reasonable.
I believe that we’re headed back to 2008-2010 valuations this year and it’s going to be fantastic for angel investors who are brave enough to place bets.
Nothing is guaranteed, and you can insert a bunch of financial disclaimers here, but candidly I’m planning on being more active in the next 12 months than I have been in my 10-year history as an angel investor.
If you’re rich and bored, or maybe even retired and regretting it, I would like to make the case for you to become a half-time or full-time angel investor.
Now, I don’t think you should invest 100% of your capital in startups this year.
However, I think rich people (aka accredited investors who have capital available) who become full-time angel investors this year should build an intelligent plan to deploy a fraction (1-10%) of their net worth.
Essentially, the amount they can afford to lose.
In my book ANGEL I explain a way to do this intelligently that goes like this:
- You want to make 30+ investments so you have a chance at an outlier.
- You want to only invest in startups that have products in market and revenue already — and there are thousands of them.
- You want to make very small bets when you start and then go 2-10x on the winners.
- You want to make those 30+ investments over a three-year period.
Here’s some basic math on the plan I recommend.
- You have a net worth of $10m.
- You allocate $450,000 for angel investing.
- You invest $10,000 into each of the 30 startups ($300,000).
- You invest the final $150,000 into your top five startups ($30,000 each).
In this model, $200,000 of your $450,000 invested will go into the top five startups.
You can assume in this hypothetical model that you will get $0 from the 25 you didn’t follow on with, and then if one of the other five pays off 25x on the initial investment ($10,000 * 25x = $250,000) and 10x on the second investment ($30,000 * 10 = $300,000) you are in the black already.
This is not guaranteed, obviously, but if you talk to folks in Silicon Valley with over 30 angel investments you hear stories of outlier investments and power laws often.
In this example, if you lose it all, you lost 4.5% of your net worth, which is not fun but is survivable (heck, if you’re in the markets right now you’ve probably experienced “losing” 20% of your net worth in a week or two).
You can strategize various scenarios for angel investing based on your time frame, goals, chip stack, age, dedication level and risk profile. We discuss all of this in the Angel.University course.
Just two examples from our investments:
- Calm is valued at 153x for us.
- Uber, an outlier of all outliers, is 2,000 to 4,000x+ (depending on when/if you sold).
If you want to learn how to become an angel investor, come to a virtual edition of Angel.University which we will host on April 7th.
We have 100 slots for accredited investors, apply here: http://angel.university
We are asking for a suggested donation of $100 per person for Angel.University: 100% of which will be donated to coronavirus-related causes like https://feedingamerica.org and https://covid19responsefund.org
In short, based on my experience, the next six to 12 months could be the best time to start angel investing since the Great Recession.
I could be wrong, this crisis could last a couple of years or as short as three months, but I know that angel investing is an amazing vocation if you’re passionate about entrepreneurship, technology, and innovation.
Early-stage startups will be on sale as capital markets constrict and funding sources slow their pace of investing and lower their slug sizes.
Fortunes are made in the down market and collected in the upmarket. Let’s get to work.
All the best, Jason