The allure, and insanity, of investing in a start-up

Published in the San Diego Union-Tribune, September 11, 2017

Why does an angel investor do something as stupid as invest in a startup?

I have considered this insanity for the past 22 years, over nine companies as founder or co-founder or CEO and another eight to 10 years as a straight investor and sometime board member.

Startup investing has a myriad of themes. At one level, you are investing in your community, you are supporting entrepreneurs of all ages and new ideas. You have a benign view of the world and want to create opportunities for the next generation.

At another level, you are going to Vegas. It is a lottery ticket, and you have too much money and don’t know what to do with the last 2 percent of your net worth, so who knows and who cares. You are in a syndicate or going it alone, and you know that the odds are lousy, but you can’t take it with you.

Nota bene: The reason those casinos got built is not because you walked away a winner.

The next level is you want to be involved. No passive investments for you, no sir, you want to be on the board or an adviser. For sure you have some opinions, and if you take my money, I expect you to return my phone call and at least consider my half-baked opinion, given that I made money in textile manufacturing and that means even though I know nothing about your software company (but am sure that I have nuggets of wisdom), my check entitles me to some of your mind-share.

The next level is a more professional one. You make four to five investments per year. You go to the plate frequently and your goal is actually to make money — with a touch of Vegas included. You belong to a group, you have deal flow and you approach it with some modicum of rigor. But you also know it is a total crapshoot.

The next level is the horse race tout. You can pick ’em. Nobody is going to sell you a bill of goods. You know valuations and vesting and you know a good idea when you hear one. (Hah.)

The one that has touched me recently is a combination of amazement and wonder — touched by gratitude and surprise. A year ago, I had five startup investments, which in the aggregate I viewed as worth zero. In each case I had bet on the jockey, but reality intervened and each of these dogs were on their last legs as of 60 days ago — dead men walking.

Then like in a movie, we got an offer for one (more than we could ever have hoped for), two got funded, and two more pulled rabbits out of the hat and are currently what is commonly known as cash-flow positive, which means they may still be worthless but they are not going broke tomorrow. My deals went from being road kill to my going shopping for new shoes and a new dress for my bride.

The feeling was an adrenaline high of amazement combined with a deep awareness of luck. This feeling is what the startup investor craves. Like a cataclysm of relief, over which you had little control, it validates the bet on that horse or that CEO or that idea.

That breath of life when the elements align and you realize that you have not drowned, that is what reinforces your need to do it again. It is addictive. That is why an angel investor does it. I play golf with a professional poker player and when he talks about pulling an ace on the river, he is ecstatic. It is the eagle on the par five. It is what keeps you coming back.

Now here is the dark sentence. What if the five dogs had died? If all five had gone broke (as they were well headed on their way to doing) would you have stepped up to the plate for five more?

Speaking personally, I don’t know. But the whole idea of investing and creating and striving and innovating — well, that seems to beat sitting on the beach. Yet, I am also keenly aware of a tsunami, sharks and jellyfish.

Rule No. 528:  Always carry a PFD (personal flotation device).


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