A friend of mine has asked me to shadow him on a private investment and manage it for his descendants should his health prevent him from doing so himself. Getting back into the process of venture capital is not really something I am all that keen on, but I’ve done it enough and am proficient enough that I’m happy to help out a friend. I made my living in finance and investments for almost 50 years and people just assume I love it…but not as much as you might think. I like having expertise, but I dislike playing the zero-sum game of who can outwit the other guy enough to walk away with the lion’s share. My friend is a true practitioner of the art of venture capital and it is clear that he loves it…and has for years. He is near the end of his playing days, but he just doesn’t want to stop playing. He was a professional investor for many years and is now choosing to be what is called in the business, an angel investor. An angel investor is an individual who provides early-stage capital to startup companies, typically in exchange for equity ownership or convertible debt. The basic profile of an angel is that he/she is usually a high-net-worth individual investing personal funds, not institutional money (my friend never played the institutional game…it is always his or other HNW individual’s money. Unlike most angels who are often a former entrepreneur or executive with relevant industry experience, my friend was always an investor. His preference is to invests at the earliest stages, before venture capital funds typically gets involved. The typical check sizes range from $25,000 to $500,000 and I’ve seen my friend operate in that full range and beyond.
The typical startup funding sequence that angels find themselves in starts with friends and family, then to the angel investors, who give way to seed funds and eventually a Series A venture capital investor who eventually bows to a later stage VC prior to the point where an IPO or acquisition are imminent. So angels fill the critical gap between personal networks and institutional venture capital. They take the highest risk, and since most early startups fail, in exchange for that risk, they get the highest potential returns, which means they have to be pretty flinty-eyed with founders and entrepreneurs. What angels bring to the party beyond money varies, but is often the most important element of the process. We have all watched the people on Shark Tank defer to the soft value of a particular shark they feel will really help them rather than the best financial deal from another shark with less perceived value to the company. The best angels are valued for their industry connections and introductions, their mentorship and operational advice, their credibility that attracts subsequent investors and the pattern recognition from their own entrepreneurial experience. The origin of the term angel in VC investing comes from Broadway theater (think The Producers) where wealthy individuals who provided last-minute funding to save theatrical productions were called angels. The term migrated to technology and startup investing in the 1970s and 1980s as Silicon Valley culture developed its own vocabulary.
The institutionalization of angel investing through angel groups (organized networks of angels who pool deal flow and sometimes co-invest, emerged in the 1990s). I was part of one such network in our bank. We had a fairly realistic outlook about it all, as evidenced by our name…Market Top Investors…implying that perhaps we were being a bit stupid about it all. Most studies suggest 50–70% of angel investments return nothing, so that was at least a proper set of expectations. Returns in the VC world are what is called “power-law distributed”, where a small number of big winners (the Facebooks and Googles) drive the entire asset class. Diversification across many bets is the standard advice, with a portfolio of 20–30 investments rather than concentrating in a few. Our ultimate proper vehicle, started in 2000 (just before the NASDAQ died a horrible death) was Beehive Ventures (originally called B-2-B Hive…yeesh!) and we made 11 investments. Following the standard “power-law distribution”, we had one big winner (eMarketer), a few OK outcomes and a host of abject losers. My aging drives taught me years ago that in the venture capital orchard, the lemons usually ripen first…and we had plenty of lemons.
In venture capital, illiquidity is significant and money is typically locked up 7–10 years before any exit. We have kept Beehive alive for 26 years by extending its life to keep the prospects alive for a few of the stragglers. And straggle they have. The good news is that we have done very well for our investors with about an 8.5X return to date. We just un-straggled one of our stragglers and are distributing some more money to our 84 investors this week…nice! That leaves us one straggler with marginal prospects at best. Putting to rest this one last bad investment has proven to be difficult for us, though its unclear why. We, as a group, generally were of one mind, but on this last straggler we have had a bifurcated view animation us for almost 25 years now. I believe we all feel its time at this point…time to bury the hope and time to do what is legally called “abandon” our limited partnership to optimize the tax benefits to all investors and to stop our own from having to maintain the accounting and tax filings necessary. My guess is that that will happen before the end of this year, but as we all know in every family drama like this, pulling the plug is a hard thing to do.
As the U.S. transitioned one hundred years ago from a rural to urban economy, industrialization brought with it the rise of the corporate career during the 1900–1940s. The “organization man” career path emerged and join a large company, climbing steadily upwards was what all college graduates increasingly wanted. The large corporation offered security, benefits, pensions, social status, and a clear career ladder and the MBA programs at Harvard, Wharton, Chicago (and yes, Cornell) explicitly trained people for corporate careers. That was my chosen path in the mid-70s. The first cracks to that were a counterculture generating genuine ambivalence about corporate careers among some graduates and starting to emphasize investment banking and management consulting as the aspirational destination for elite graduates (including yours truly). The LBO era meant finance was where the money and excitement were and combined with corporate downsizing — layoffs, restructurings — it all shattered the implicit loyalty bargain permanently. And then came the entrepreneurial disruption of the 1990s, caused mostly by the internet, which created a genuine alternative universe to the public company or investment banking career. The tech dominance era were upon us and that’s when Beehive was born.
I spoke to another friend this week. He was an engineer when that was a sure-fire career path, but he morphed that into a corporate career in a mid-level sort of place. But along the way, he learned some skills and saw some market needs that others were overlooking. He started up his own company with a few employees and he spoke with a mutual private equity drones of ours. He chose to go it alone and self-fund his operation in true entrepreneurial form…without any venture capital. He has now wound down his company after a very successful run that allowed him to bank enough money to last him his lifetime and more. It is a great success story and it warms my heart to see it happen, not just for my friend’s sake, but for the sake of the notion that people can succeed without financial engineering (even though that’s what I provided for many years).
All of these stories are versions of what I call angels in the endzone. One person who loves the art of deal, one (myself) who loved the professionalism but not the deal, and one who eschewed the deal and just did what he knew best. We were all fortunate to succeed in our own ways and we are all in our preferred endzone or endgame. I suspect that we were all some form of angel (or perhaps devil) along the way.