Why I Became an Angel Investor

Why am I an angel investor? I have been very, very, very lucky in my life to have both a) come from a family history of entrepreneurs and b) as a young man had as teachers and role models men and women who deeply understood that the blessings of the American way of life are mostly dependent on our thriving free enterprise system. And who understood that that system is wholly dependent on our vibrant spirit and culture of entrepreneurship.

These early life experiences established my general business mindset, which I maintain to this day. It is a mindset of great admiration for business success. Of putting those at the top of my "respect pyramid" those that create value and wealth via their own hard work, creativity, and opportunistic sense of risk and reward.

No where is this culture of success more pure than in American small business.  The owner operator - where the core managers of a business are also its majority shareholders - is the dominant form of business organization in companies with less than $50 million in revenue. These brave souls are far more than professional "managers." Rather, they embody Picasso's famous credo, that "work is the ultimate seduction." They pour their lives, their fortunes, their very identities into their businesses. For these modern-day Horatio Algers, their businesses are far more than simply a way to make a living. They are sacred undertakings. Crusades. Legacies.

And you know what? The vast majority of these companies - according to Thomson Reuters - are far more profitable and earn a far higher return on invested capital than their large, corporate, publicly-traded brethren.  

The bottom companies on the Inc. 5000 - a list of the fastest-growing privately-held companies in the country - show year-over-year revenue growth averages of over 70%!

Unfortunately for the angel investor, most of these companies aren't for sale - either in whole or in part. According to Scott Shane, one of the nation's leading experts on angel investing - less than 5% of all private companies ever seek outside equity financing of any kind. These companies don't need nor want our money because a) they are cash flow positive and b) the process of raising capital is often too time-consuming and distracting from their day-to-day operational responsibilities.

A small percentage of these companies do take in outside investment. The larger companies mainly seek and get it from private equity - and to a lesser degree - venture capital investors. But a few of them - either because of the smaller amounts of money they are seeking or because of a philosophical aversion to professional investment capital - seek angel investors. And thank God they do. Why? A few reasons:

1. High Rate of Expected Return. Angel investing is by far the highest expected rate of return form of investing, with average rates of return in excess of 25% (PricewaterhouseCoopers, Kauffman Foundation, Center for Venture Research). This compares extremely favorably to both later stage VC investing (14.5%) and to public stock market investing (8%).

2. Home Run Potential. Emerging companies are the only investment class that offer true "home run" investment potential. Almost all great investment fortunes were made via positions in small companies that became big. This list is legion, and runs from Standard Oil, AT&T, DuPont, and Ford, through IBM, Hewlett-Packard, Intel, Wal-mart, Microsoft, and Oracle, to modern day supernovae like Amazon, Google, PayPal, and Facebook, LinkedIN and Twitter (all soon-to-be).   

3. Connectedness. Investing in small, privately-held companies offers a connectedness, a realness, a "human scale" interaction best compared to philanthropy. When I make an angel investment, I am doing good while doing well. I am making a high expected return decision for my personal portfolio while effectively buying a "Google lottery ticket" so to speak.

And I am multiplying the entrepreneurial force I pour into my own company, and in most circumstances, am providing the fuel for fantastic innovations that can transform the world in diverse arenas like drug discovery and alternative energy. And I contribute to the overall spirit and culture that makes America the greatest country in the history of the world. And I get rich in the process. What could be better than that?