People keep asking me about bubbles. Are we in one? When will it end? Has it already ended? Did it end last week and are we now in another one? And so forth. I do get a bit concerned about twenty year olds raising $4.3MM for their startups but by and large I think the perception of rational exuberance is largely driven by a small handful of very hyped companies. Behaviour in the angel investment scene, on the other hand, frightens the crap out of me.
Before Dave McClure shows up on my door and punches me in the face, let me be very clear: starting a company is one of the best things you can do. You’ll learn more than any MBA, regardless of the outcome. However, I categorically do not think the same about angel investing. If you’re going to make small investment in companies, you should fit into one of three categories:
1. You’ve started and/or run a company before. You understand that things frequently go wrong and it’s entirely normal for a company with a successful outcome to come perilously close to bankruptcy on more than one occasion. You’re able to pick winners because you’ve been there yourself.
2. You’re going to invest in at least thirty companies. The statistical probability of a startup surviving is very small. If you’re serious about making a return, you need to take a portfolio approach i.e. you need to have plenty of money to throw at it.
3. You are completely comfortable with not getting your money back. Ever. Spelt L-E-H-M-A-N.
Right now there are too many angel investors who don’t fit into any of these boxes. Chances are they’re going to get burnt. Or worse, they’ll get scared and potentially disrupt the running of the company they’re invested in. Trust me, the last thing you want is a panicky investor.
In the time it’s taken to write this post, I’ve received three investment pitches (my daily average is about six). As a trend, this is fantastic. We need this behaviour to jump-start our moribund western economies. But startups, please do everyone a favour and don’t take angel investment from the equivalent of the elevator boy.