THE ANGEL INVESTOR’S DILEMMA
Building their portfolio company by company, the angel invests each time with the belief that the company in question might well succeed. But when stepping back and appraising their portfolio as a whole, they must reconcile with the fact that they will lose a distressing portion of their initial investment and see no returns in the short term.
Angel investing (which I’ll define as investing in very early stage companies, typically the first injection of capital a company receives from persons who are not friends, family or founders) is a very high-risk activity. Bonds, stocks and property pale in comparison on the risk scale. And the returns, though potentially substantial, are a far-off prospect — perhaps five to seven years down the road, as compared to immediate liquidity in public markets and two-to=four year liquidity in many real estate opportunities.
But the greatest dilemma is that, along the way, most of your portfolio will perish (along with your investment) in the do-or-die startup arena. As an angel, you go in believing each of your portfolio companies will be an amazing success, and are truthfully devoted to that goal on a startup-by-startup basis, yet your overall calculus must account for an overall failure rate of over 60%.
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