Becoming an “angel investor” is not for the faint of heart. It isn’t quite as exciting as jumping out of plane at 40,000 feet or hang gliding off a cliff at 3000 feet, but when it comes to knowingly entering into an investment that by its very nature has the potential to lose every penny of your hard earned cash… that takes guts. So here is what one needs to understand about the men and women who boldly go where mere real estate and stock market investor don’t dare to go. Of Freud had been around during the Dot.Com bubble and the latest up/down of angel investment, he may have applied his theories of the Id, Ego, and SuperEgo in this way.
The motivation for sophisticated affluent men and women to become angel investors or as some might label them, early stage venture capitalist is driven fundamentally deep within to face the risk in pursuit of a perceived big reward. The thrill seeker who jumps of a cliff to fly through the air, does so knowing there is risk, but the reward, the thrill, the adrenaline, the sense of accomplishment, the oohs and aahs of their peers that see their success….all triggers the desire to face known risk. Becoming an Angel Investor can be compared when viewed through the Freudian theory of development.
- Investor Id: What does the Id care about? ME, ME, ME….so in the realm of money, that translates to greed—What is in it for ME. So these these folks will take the risk because it has the potential biggest return on investment and the only asset class that actually has potential to provide multiples on money within a decade of the investment. And the bragging rights of being in some hot new thing doesn’t hurt. Whether on the golf course or over cocktails talking about breakthrough in technology, “Sure, about a year ago I invested in a little company that does Y” or is in a popular magazine for doing X….”Oh ya, I have some of the equity in that company…. got it for a song as an early investor.”
- Investor Ego: This is where the pragmatic hat goes on and even though the investor wants to make all the money and negotiate all kind of terms to guarantee that, they realize that the CEOs need to be motivated, and there needs to be room for other investors to come on and follow on investors. So instead of mitigating risk based on onerous terms, they will seek to invest in deals that inherently have some of the risk removed because the company has been validated. This is where the real RISK vs REWARD trade off come. “Without a more experienced management team to ensure you can execute, I will require a board seat.”
- Investor SUPEREgo: This is where an investor become a “Compassionate Capitalist”. Usually, only the most advanced investors reach this stage. They have made so much money from their own entrepreneurial endeavors and from their past angel investments, that the can “afford” to be generous with their investment into entrepreneurs. They know that many of their investments will fail and they go ahead because they really want to see that innovation get to market or to give that entrepreneur a chance to succeed because they can see the spark. They have confidence that some percentage of their investment will hit payload and make up for everything they have lost previously. They have pursued their professional hobby of investing with zeal by learning by doing and learning from others, so that their Financial IQ is top of the game.
Unfortunately, for those that jump in at the Id stage, they sometimes never get to the other stages of advancement because they make a poor investment, lose a lot of money, and decide to stick with the much more predictable stock market and real estate. This is why education for investors at that very early stage of their exploring angel investing is so important.
Angel investing is the only type of asset class that the investor can’t get advice from their financial planner or wealth manager regarding. SEC will fine that trusted adviser and potentially even pull their license if they find out they advised them on a private equity investment…..or so that adviser thinks. It really only happens if they take a commission on the transaction and does not run it through their broker dealer. Nonetheless, most often the case is that the investor can’t sign up for weekend class, has to drudge through book written like college text books or learn by doing which early on means learn by losing.
Fortunately, as the angel investor industry has gotten more and more successful and sophisticated, the industry has taken it upon themselves to begin offering education for investors. We have seen large conferences being offered in Boston and San Francisco. With the advent of Georgia passing their own Angel Investor Tax Credit to encourage sophisticated investors to put money into early stage private companies, there have been an uptick in education being offered in Atlanta. Other states offer tax credits and subsequently education.
We have long been a source for investor education through our email newsletter and our “Inside Secrets to Angel Investing”. Excerpts are available when you optin. Information is available about the book and the limited time offer with 6 bonuses at http://angelinvesting101.com