Monday, March 8, 2010

Is Angel Investing Irrational?

The Berkley Center For Entrepreneurial Studies at the Stern School of Business is famous for its courses and co-curricular activities in entrepreneurship and innovation. On February 24, 2010, the Berkley Center’s Himelberg Speaker Series featured David Rose, Chairman of the New York Angels (, angel investor himself, founder of Angelsoft (back-end infrastructure software) and manager of a proprietary portfolio that consists of no less than 75 companies. Rose was invited to present his strategy in angel investing. He faced an auditorium tightly packed with about 300 entrepreneurs, entrepreneurs in the making, and investors in entrepreneurial ventures. Rose spoke for a good two hours to mainly communicate one idea: angel investing is irrational.

Who are the angels? They are individuals (they are not professional money managers who represent institutions, endowments, or wealthy individuals); they are rich (-ish) people who invest their own money for economic or other reasons; they invest on average amounts that range from $25K to $100K. Yet, compared to Venture Capital investments (that today represent later stage investments), angel investments cover about 49,000 deals (and about $20 billion).

Why are angel investors irrational? Because they know that half of the deals in which they invest will go under and the rest will greatly underperform expectations. While the economics of angel investing is predictably irrational, it is also highly lucrative as long as angels invest in that one deal that will return a 30 times multiple the original investment and will compensate the investor for the losses he incurred with the rest of the deals that flopped or underperformed.

How does one find deals to invest in? Rose insists that there is logic to the madness of angel investing. He usually looks for:

· Large and growing market

· Scalable business model

· Competitive advantage

· External validation

· Reasonable valuation


While every deal comes with a team, the most important person for Rose is the ENTREPRENEUR, someone who has already demonstrated:

· Integrity

· Passion and the desire to create something big

· Experience (but not necessarily in the field of the new enterprise)

· Knowledge

· Skills (how to make it happen)

· Leadership

· Commitment (to her idea)

· Vision (to change the world via her idea)

· Realism

· Coach-ability

Having completely disproven his original point, Rose defined angel investing as a highly complex thought process that focuses less on analytics and fancy presentations and more on the qualities of the people on the team.

1 comment:

  1. This post addresses a fundamental and pervasive issue: Angel investing may have a larger irrational component to the decision making process for or against an investment, but isn't it the same issue with all investments? After all due diligence is done, and granted that there is not enough of that, there is still no certainty of anything, and in the end it is the individual investor's personal synthesis and weighing of all factors, which is based also on irrational factors, that will determine the decision.