Real-Life Angel Investing Returns 2012–2016

From my stint working in the bay area, it seems like tons of older low level executives at tech companies (probably bringing in comparable income to staff engineers at FAANG) treat angel investing like golf. Most of the wealthy folks will do it at least once as a social activity, but most of them don't really know what they're doing.

> From the post: "When you invest in a startup, the money directly goes to the economy to build up a business, to create jobs and to actually contribute to the trickle down economy."

and this is completely wrong.

The money public investors pay to exiting shareholders do play a major role in the economy - it enables the early, IPO/angel investors to exit, and allows them to convert capital locked in the established startups to new startups, without waiting to "cash-out" using the company's profits (which may be years away).

In other words, the public markets makes capital movement much more efficient. It lets high risk takers take on bigger risks (for the corresponding potential return), without taking up the required time.

It's a misconception that many people have, that investing in the public markets is less useful to the economy than direct investment. Both play a critical role, and without one or the other, the capital markets will be _way_ less efficient.

Equities in a given sector, whether public or private, tend to be highly correlated, but external observers just don't really get the full picture unless they dig into the specifics of the situation.

IME, private marks in aggregate are less volatile than equivalent public performance for a wide range of reasons, but that doesn't mean that a private manager can liquidate a portfolio company at an optimistic mark in a downcycle any more than the manager wouldn't be able to get a better price than the last mark in an upswing.

I think it's also worth clarifying for other readers that the risk you're talking about is volatility and has nothing to do with the actual fundamental risks of a given investment. Private equity (broadly defined) managers look to minimize risks in their investments, but they're talking about business and financing risks. I don't think I've ever heard a private equity manager ever talk about minimizing volatility and I'm ok with that.

Real world isn’t Blind

I am also curious how many hours this individual put into the investing. I put about two or three hours a year into my investments in VTSAX and VTIAX -- just rebalancing. I would expect given the nature of angel investing that this person put in a good deal more work.

Let's say the per company deal size is $100k, and the excess risk adjusted returns are 2%. That means the deal would be worth about $2k extra to you, annually. (I'm counting your baseline investing effort as epsilon, so the deal gets no credit for returns matching my mutual funds.) Suppose your daily rate is $2k/day. You'd want to spend no more than a work day on this deal, per year, over the life of the investment.

If the amounts are smaller, or the excess risk adjusted returns are lower, then you'd want to spend less time per deal. This calculus also only applies if you have enough money to roll the dice enough times for the risk to even out. If you only have a million to invest, you'd only be able to do ten deals this size. Perhaps your hourly rate is lower, so you haven't accumulated as much of a warchest. In that kind of situation, you might be willing to work more for the same absolute amount of excess returns, but your risk would also be higher. So your risk-adjusted excess returns might shrink to a negative value.

Of course, you can tweak all the variables as suits you, and also there's the possibility that you are person who just enjoys angel investing, the feeling of importance that comes with hob-nobbing with the who's-who, etc. If that's so, then you could view the work as the price of entry, to the extent that it underperforms ordinary investments.