Startups Blessed With World of Angel Investors

Published in UT San Diego, May 11, 2015

Angels in America. Actually there are angels in the world, and they do not dance on the head of a pin. Instead they came to San Diego in April to discuss investing — 650 angel investors from around the globe.

I was mesmerized. There were Montana angels and New York angels and others from Scotland, England and Barbados, as well as China and Australia. The place was crawling with investors — all interested in chasing and hunting down the elusive animal known as “the startup.”

Sometimes we in San Diego can get myopic focusing only on “the valley” or Los Angeles, Boston and New York. The fact is the investing game is worldwide. And, of course, the French have a word for it — “plus ca change, plus c’est la meme chose” or said another way – “It’s a tough game, and you have a pretty high chance of losing your shirt.”

One speaker was Gil Penchina, one of the most famous angel investors and the largest syndicator on Angel List. He has been enormously successful with picks like Indigogo, Pay Pal and LinkedIn. Modestly, he claims he got lucky, although it sounds like more than luck to me. Here are some of his observations.

Penchina says he has made more than 70 investments that “did not work out.” That is code for you can paper certain rooms in his house with those stock certificates. He says, “I would have been better off taking the money and setting it on fire in the bathtub — at least I would have been warm.” He is not the biggest fan of lawyers, limited partners and accountants.

In that case, my advice is maybe you should pick another business.

Another speaker was Jean Hammond. Her advice was succinct. “Angel investing is a contact sport.”

Speaker David Rose talked about his site, Gust. It takes angel crowd-funding and makes it simple and effective. More than 125,000 startups have already used this platform to connect and collaborate with more than 35,000 individual accredited investors. This guy can certainly fill his own private Rose Bowl.

So while this column rarely ventures into politics, let’s take a tiny step across the line today. As a country, we pay lip service to the power of innovation and entrepreneurship, so now let’s check in with Alan Watts, who heads an angel group out of England and Ireland. Those two countries support investing by giving huge tax breaks to the angels — up to 50 percent of the investment in a tax credit and the gain (if there is one) is tax-free.

Yes, he did really say tax-free.

The above story illustrates why it is so hard for the rest of the world to invest in American companies: taxes. I do not profess to have any good answers, but in the international conference that I attended, there was a lot of discussion about taxes and their impact.

Back to the future. Another key thing Watts does is videotape every pitch his angel groups receive. This reminds me of giving a deposition, but in this case, the learning feedback loop is enormous. After all, we all know the power of a great pitch.

I polled many of the attendees on their best exits, and it seemed to hover around three to four times their initial investment. This is passable but not enough to get you much ink on TechCrunch. And, of course, as to the failures, they all spoke honestly and said they had their fair share. One fellow said, “It was OK, we lost all of our money, but at least we didn’t get sued or end up on the back page of the tabloid.”

So, why do the angels do it? Altruism, staying relevant, buying a lottery ticket, hope springs eternal, you can’t take it with you, I like the action, somebody finds Google, it’s cheaper than doing drugs — the list is endless.

The game and the enormous number of players fascinate me. Twenty years ago, this asset class was less than tiny. Today it numbers in the billions of dollars of value created. It tells me there must be a heaven. Otherwise, what would all these people do with their wings?

Rule No. 406

If you’re so smart, why aren’t you rich?

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