Angel Investing: A Hard Way to Make Money
Individuals investing in business start-ups shouldn’t expect instant riches. In fact, they can expect that most of their investments will fail, and they can only hope that one or two investments will be big winners. Even winning investments can be hard to monetize. About a dozen years ago, I invested in an angel fund. Angel funds bring together a group of individual investors who pool their money and collectively invest in small companies. Typically, angel funds have very low fees because the members manage the fund and make the investments.
Despite a roster of seasoned investors and our attempts at due diligence, most of the investments failed. For the better part of a decade, we’d only recovered a tiny fraction of our original investment. However, one of the investments, ChannelAdvisors, a company that provides e-commerce optimization for businesses, turned out to be a winner. After more than a decade and numerous rounds of financing, the company went public (OTC: ECOM) last summer and was well received by the stock market. As private investors, the angel investors were required to hold their stock for six months. This agreement is known as a lockup.
The lockup just came to an end and in theory I’ve enjoyed a tenfold increase in my investment in ChannelAdvisors for an annual return of 27%. Unfortunately, my overall investment in the angel fund hasn’t done nearly as well. While I should wind up making a profit on my thirteen-year investment, I would have been far better off investing in the S&P500 or even bonds.
At the moment my gain in ChannelAdvisors is still theoretical. While many other insiders are now able to trade the stock, the paperwork enabling small investors to realize their gains has not been finalized. A company called Computershare is supposed to provide me with access to my shares in ChannelAdvisors. Dealing with Computershare is worse than dealing with Healthcare.gov. I was actually able to register on Healthcare.gov, even though I couldn’t buy insurance. At Computershare.com. I haven’t even been able to register, let alone get my hands on my shares of ChannelAdvisors.
My experience as an angel investor is fairly typical. Most angel investments have great entertainment value for those investors interested in tinkering in startups. However, the overall returns are mediocre and the paperwork is a big pain. As individual investors, angels are sought after when a company is launched and forgotten if the company succeeds. In other words, our cash was vital in helping to launch the company. However, after several rounds of financing and an IPO, the original angel investors have lost their significance. At the moment, all I have is a great story to tell at a cocktail party about how I invested in company that made ten times my money.