What Angel Investors Can Learn from Facebook’s IPO


The biggest technology IPO in history has rightfully captured the imagination of both the general and investment public.

However Facebook's stock ultimately performs, what is written is that those that invested in the company in its early days made one of the most incredible angel investments in history.

As a private company, Facebook has been not obligated to disclose the exact prices at which it sold shares in its early financing rounds.

However, both by pretty simple math and disclosures by the principals involved, we can pretty much deduce both the percentage and real dollar return of some of Facebook's earliest investors.

Most famous among them is Peter Thiel, who we know in 2004 invested $500,000 into Facebook at a valuation of approximately $4.9 million.

Facebook S-1 filing shows him now holding 44,724,100 shares of Facebook Class B stock - which at the estimated $41 price at which the stock is expected to go public - would be worth more than $1.8 billion.

For those scoring at home, that represents more than a 36 thousand percent return in 7 short years.
Now, first of all I think anyone who has ever made an investment of any kind - whether it be in real estate, in the stock market, in a commodity, in a private company -  that doesn't read that and not admit to at least to a little level of jealously and sense of the unfairness of it all…

…well, I would say that person is either lying, in denial or is just plain discouraged by this now 13-year “lost decade” of investing return that almost everyone that did NOT invest in Facebook has experienced.

So once we put this natural (and may I add wholly unproductive) emotion aside, the thoughtful angel investor should both gain great hope and powerful moving forward lessons from the Facebook IPO.

The first lesson is sector. 

Professor Scott Shane, one of the world’s foremost researchers on angel investing returns, makes the simple but crucial point that when it comes to making quality early-stage private company investments, technology is king, queen, court and everything in between. 

How important is it to have one’s investing focus be tech?

Well, Professor Shane estimates that the return expectation differential between an investment in an early stage, privately-held high tech company and one in a low tech company to be as much as 20x!

How can you make this work for you? 

Well, a simple shorthand to use is the “TechCrunch” test – i.e. whatever sector that most famous technology blog is writing about is a pretty good bet that there is also a LOT of smart angel investment money pouring into dynamic companies in it.

These days that includes social networking, gaming (mobile and otherwise), healthcare information technology, personal and business productivity software, entertainment convergence, and of course all things Apple.

This points to a second Facebook IPO lesson for investors, namely liquidity “signaling.” 

Sites like SharesPost and SecondMarket have become famous for their active and decent bid and ask spreads on high profile and cleanly capitalized tech companies like Twitter, LinkedIn, Zynga and Groupon, among many others. 

How these markets might fundamentally transform private equity investing for the better in the years to come is a story for another day, but for now the intelligent angel investor can view shares trading on these markets as great “acid tests.”

Simply asking the question of whether or not the shares of a private company could ever reliably trade - i.e. generate buying interest - on a popular trading market is a great signal as to the quality of and the prospects for the investment.

Folks, we're just getting started. 

Next week, we'll discuss an angel investment lesson from the Facebook’s IPO so powerful that a whole multi-billion dollar industry is springing up around it.

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