The point of reviewing these examples is to highlight what it takes to be a great angel investor.
Salesmen rarely make good managers or business owners. But that doesn’t stop them from trying.
It used to be a hallmark of American business that successful salesmen were promoted. The logic is obvious. Whatever makes Joe or Amy great at selling the company wares should be emulated by others, thereby making the company more successful.
But selling and managing require very different skills, much like playing a sport and coaching are different.
Sometimes good salesmen, people with great interpersonal skills who grasp what’s important to other parties in conversation, can successfully transition to running a business. But more often than not, they lack the attention to detail and ability to switch between focusing on the big picture and mastering the nuances of daily operations to succeed.
In the end, everyone is frustrated, and the company hasn’t prospered as expected.
The same thing happens in our personal lives. We achieve success in one area, and assume that it’ll happen in other areas. For too many people, myself included, the result is frustration. In my case, I get the added bonus of losing money.
I started my Wall Street career trading bonds. I know the interest rate market inside and out. I can discuss Liquid Yield Option Notes (LYONs), inverse floaters, and repurchase option agreements, and I know the ins and outs of collateralized debt obligations (CDOs) as well as derivatives on debt. I understood the financial crisis at a level that made me sick.
I’ve also spent many years investing in equities and options, and I use a proven strategy to run my Triple Playservice. All of this makes me well educated in the world of finance.
None of this makes me an astute investor of early-stage businesses. But that doesn’t stop me from trying.
My History in Angel Investing
The siren song of 1,000% gains lures me in. And I’m swayed by the idea of bypassing all the noise on Wall Street. So from time to time, I open my checkbook and break one of my investing rules. I get involved in something that’s not my expertise. The outcome is predictable.
In 2008 I had the chance to invest in an ethanol plant. I passed. I saw ethanol on the rise, but our economic forecast called for slow GDP growth, and as a nation we were making strides in better fuel efficiency. Stepping aside was a good move.
I also got the chance to invest in old, land-based oil (NYSEARCA:USO) wells. Not shale fracking, but swabbing old-style wells. This would have been a disaster in the face of falling oil prices.
But a new memory chip company hooked me. This firm makes large chips that are used in many renewable fuel applications, and it has few competitors. The story was solid, as were the books. The management team had great experience and past success. The goal was to grow the business for 24 to 36 months, then either IPO or sell to a large competitor.
I’m still waiting.
The latest plan is to take the company public. In Hong Kong. In 2019. The company still makes a great product, but for whatever reason, it hasn’t attracted a buyer at the right valuation.
I’ve also put money into a biotech (NYSEARCA:IBT) company. It’s not exactly angel investing since the shares trade publicly, but they trade on the bulletin board at less than $1. I heard about the company from a financial advisor I like and trust. I also met several investors over a meal. The company was expected to announce a breakthrough within the year.
That was three years ago. I still own the shares.
As with the chip company, this firm still has tremendous promise. I’m not counting it out. But neither investment has performed as expected. I haven’t earned the returns I anticipated, and, in the case of the chip company, I don’t have liquidity.
The point of reviewing these examples is to highlight what it takes to be a great angel investor. You have to do one of two things. Stick to something you know exceptionally well and resist the urge to be led astray by success in another field, or invest in a wide array of opportunities to increase your likelihood of success.
There is a third option. Follow someone who’s proven to be successful several times over in picking great, early-stage companies. We’ll have one, Howard Lindzon, at our Irrational Economic Summit in October. There’s nothing wrong with the “me, too” style of investing, especially if it gives you the results you want.
Those words echo in my head I as reflect on my latest early-stage investment. Earlier this year I put a small amount of money into a new microbrewery (yes, I know, the market is saturated). Their angle is that they partner with musical acts, perfecting brews that match the taste of the band.
If you’ve had Hootie’s Homegrown Ale, Rebelution’s Feeling Alright IPA, or 311 Amber Ale, you’ve tasted our wares. They also have a small, 175-person performance venue above the brewery in historic Ybor City in Tampa, Florida.
I have no idea if it will make any money, but at least I can kick back with a cold one and listen to some good music!