If you are reading this blog there is a very good chance you are rich. Or well on your way to becoming rich. Or you may be closer to your starting point and being rich still seems a distant, maybe even improbable, destination. Or you may only stop here briefly before moving on never to return again and, in that case, you’ll likely never have to worry about what to do with all the money you’d have accumulated.
But if you are on (and stay on) this path, you will wind up rich and you will have to decide what then to do with all that money.
This all unfolds slowly in the beginning, starts to careen upwards and then, somewhat suddenly, there you are. What you very likely will have seen looks like the blue line in this compound vs. simple interest graph:
Having written this blog since 2011 and having now hosted Chautauquas since 2013, I’ve had the chance to meet and talk with many folks on the far side of this graph. One of the common topics is what to do with all the money they suddenly find themselves with. And most of the ideas around that are about how to do the most good with it. This is something we wrestle with ourselves.
You can, of course, just give it away to charitable causes and I describe our approach here:
How to Give like a Billionaire
This is the core of our giving and will remain so. But I am an investor, rather than a spender. And charities are by definition Spenders. In a good cause certainly, but spenders nonetheless.
This is why I was so enthusiastic about:
My initial contribution could be lent out, repaid and lent out again over and over, creating a long lasting, repeating benefit to the target recipients. This has enormous appeal to my nature, and we are still actively engaged with Kiva. But, as you’ll see if you read the comments in that post, this approach is not without its critics and challenges.
More recently, my pal The Mad Fientist put up an another in his excellent series of podcasts, this one interviewing Doug Nordman, the founder of The Military Guide, a blog about achieving FI (financial independence) tailored to military personal. In this podcast, while he only touched on it, Doug introduced me to the concept of…
Angel Investing as Philanthropy
Moments after listening, I reached out to him for the guest post below outlining his ideas and experiences in detail, which he graciously provided.
That’s Doug in the picture above:
Retired U.S. Navy submariner and current FI blogger, angel investor and surfer bum. And, yes, I would accept money from him. Not that he’d be foolish enough to offer it.
So here it is:
The real story of what angel investing is, what it takes and what it takes out of you, and why it is most often a form of philanthropy. There’s a lot in this tale that surprised me. Maybe it will you, too.
Take it away, Doug!
Angel Investing, Or Angel Philanthropy?
I thought angel investing would consist of talking with a few people, writing a couple checks, sitting back for a year (perhaps while sipping frosty adult beverages), and then collecting on those righteous exits.
Let me explain why I got it all wrong.
I’ve never had a civilian job, let alone a startup business. I’m a retired U.S. Navy submariner and my spouse is a retired Navy Reservist. We met in college and less than 20 years later, we reached financial independence on our high savings rate. I hung up my uniform in 2002 (at age 41) to enjoy more family time, and I never pursued a bridge career.
As our investment portfolio recovered from the Y2K tech recession, I explored just about every way to improve our returns. I read voraciously and practiced all the typical styles: stock-picking, technical analysis, swing and momentum trading, dividend growth, IPOs, real estate, and even call & put options. Five years later I concluded that the harder I worked at it, the higher our returns were– but it was an overtime job with no vacations. During the Great Recession, I moved most of our portfolio into passively-managed equity index funds with low expense ratios.
During those years, my spouse and I also researched our philanthropy interests. I dug into it just as deeply as investing, and we volunteered quite a bit of our time to non-profit groups.
Hands-on philanthropy introduced us to amazing people and great organizations. (We met a few stinkers, too.) Eventually we realized that (like investing) our volunteer hours were turning into full-time jobs whose drawbacks almost outweighed the benefits. A few of the recipients showed a sense of entitlement, while others struggled against crippling personal issues which we couldn’t make better. If we volunteered at executive or administrative roles that were further away from the beneficiaries, then the bureaucracy (and even some of the employees) seemed to lose touch with the mission.
We were doing good things, but we weren’t feeling challenged or fulfilled by our efforts. It was way too easy to focus on the negatives and burn out. I eventually found my own philanthropy niche by donating all of my writing revenue to military-friendly charities and helping every reader who asks me a question. I’ve only donated a tenth as much as we’ve given away to other charities, but my personal experience at paying it forward has been at least a hundred times more fulfilling.
In late 2007, while we grappled with our investing and philanthropy experiments, a friend invited me to an afternoon with the Hawaii Angels.
By now I was wiser (or at least more experienced). I’d read all the 1990s Internet legends about angel investing, of course, and I knew that I wasn’t going to get rich(er) from it. However I met a lot of interesting people in that room, and some of them seemed pretty smart. This was an unprecedented chance to earn my wings, and it made sense to do it now (at the hypothetical peak of my cognition) instead of being tempted by it when I was in my 70s.
I dove into startups with the same intensity as our other research.
Angels have to be accredited investors, and we meet the SEC Section 230.501(a)(5) requirements. Today the JOBS Act and crowdfunding have created a new class of investors with a fraction of the assets. The entire startup sector has become ripe for manipulation and fraud, and if I was starting over again then I’d begin with AngelList, Venture Hacks, and Paul Graham at Y Combinator. Before you make your first investment, though, I recommend that you join an angel group and learn due diligence from the experienced members.
At first, angel investing made me feel like a hyperactive four-year-old running wild in a candy store with a fistful of money. Every founder was impressively motivated, every business was a bazillion-dollar market, and every financial projection grew at least 100% per year.
I had to apply discipline to my motivation. I decided that I was only going to make 10 investments (which was a mistake), and no more than two per year (another mistake). Then I’d stop investing (mistake #3) until my after-tax profits from my earlier exits could pay for more investments. (Yeah, I wrote that with a straight face.) A decade later, by age 60, I’d wrap up my angel investments so that it wouldn’t complicate our estate planning.
In the last nine years with Hawaii Angels I’ve screened an average of 200 pitches per year, followed up on at least 50 live presentations per year, done due diligence on a dozen per year, and invested in as many as three per year. During the first five years I made 10 investments in nine startups. (My 10th investment saved an existing company from shutting down.) I’ve made several followup investments in two startups (which seem to be working out) and I regret passing on a followup in another. (At the time it looked like a very bad idea.) I’ve also invested in the accelerator Blue Startups, which is the equivalent of an index fund of founders.
I made my first investment in late 2008. Four of the first nine startups shut down within a few years, and a couple of those failures were quite educational. One more startup is turning into an unfunded zombie while it develops better tools. Two of them have survived bankruptcy drama and two more should pull off an exit by 2020. Blue Startups is making huge strides with an outstanding team and a solid process.
That’s all I’m going to share about how to be an angel investor.
Now I’m going to write more about why you might want to be one.
Humans and angels
Let’s start with the human factor.
In the military you build lifetime friendships by sharing a common mission, hours of boring duties, intense personal experiences, and a few moments of sheer panic. Angel investing has many of the same characteristics, luckily without the ordnance or explosions.
Angel investing is more than just becoming filthy rich. It’s perpetually searching for solutions to hard problems, mentoring the people working on them, and equipping them with the right resources. That reads a lot like what I did during my Navy days.
I’ve sat through thousands of hours of meetings over the last nine years, and at times they’re boring. (I hope I’ve kept it interesting.) I’ve reviewed thousands of pitches, and I’m tired of reading enthusiastic hyperbole from yet another bright-eyed MBA’d founder who’s going to leverage Google to become the Uber of Facebook for AirBnB.
I’ve participated in hundreds of due-diligence sessions and annual meetings. When a very persuasive founder can’t (or “won’t”) answer your questions then the atmosphere turns intense. Angels who are business execs with an eight-figure net worth use vocabularies every bit as colorful as my submarine shipmates.
I’ve experienced the panic spikes too:
– reading the headline that “your” best startup just shut down.
– seeing online photos of a founder who was… not sober. And that’s not their spouse.
– casting the board’s deciding vote on firing a founder.
– being served as a defendant in a trademark lawsuit in federal court.
I’ve met many amazing people who are smarter than me in all sorts of ways. I’ve made lifetime friends who’ve shown me a whole new world. I’ve spent far more than the cost of an MBA, but the mentoring and experience has been priceless.
I’ve learned that the people are the most important factor. You have to trust the founders and choose only the investors (and board members, and advisors) who add value beyond their money. You’re going to be stuck with this team for years, so you better be compatible. You may also have to call them out on their mistakes, even when you don’t want to.
It’s not about the money.
Riches are a byproduct of startups, not the purpose.
If you’re in angel investing for the money, you’re going to have a very disappointing experience.
First, you won’t have enough money. Founders want an absolute minimum of $10,000 from each investor, and $25,000 would be better. (The accounting and the legal paperwork are expensive, let alone products and sales.) You want to invest in at least 10 startups (20 would be better) and you want to make follow-up investments in at least half of them. (It’ll be painfully clear which half.) Your follow-up investment might only delay the failure for a few months. Or, by the time a company succeeds, they won’t want your money anymore and might not make the time to talk with you.
Second, startups need ages to grow into big exits. Instead of the legendary 18 months, it’s eight years.
Finally, the odds are heavily stacked against both founders and investors. Only one company out of a hundred will be a Google or a Facebook, and it will still be a terrifying ride. You won’t invest enough money in the seed round, if you even get invited. You’ll be frustrated by the call for more money to get to the A round, and you’ll be too discouraged to invest your share. If the startup is acquired by another company, it might be an exchange of your illiquid preferred shares for slightly-less-illiquid acquirer’s common shares. (You would never buy that penny stock trading in the pink sheets, but they’ve just bought your startup.) If your startup goes for an ill-advised IPO then you’ll still be locked into the shares for at least six months afterward. By then every other early investor is trying to unload their shares, too, so the share price drops by half. You’ve already waited a decade– are you going to wait another couple of years for the rest of the market to validate your patience? Even worse, are you going to buy more of these suddenly “cheap” shares?
I’ve only covered the biggest risks of angel investing. There are many more ways that unscrupulous founders and investors can legally deprive you of your profits, or even force you to invest more just to preserve your initial shares. You will not get rich quick.
You’ll be a better investor.
I was only ready for angel investing because I’d spent over two decades learning the basics of investing and then tinkering with advanced techniques. Ironically, the due diligence process of angel investing taught me to ask better questions and do a more thorough analysis. That would have made me a much better stock-market investor. I’ve learned a lot of accounting, business law, market research, product development, customer validation, sales, and growth skills. I had to acquire that knowledge before I committed my hard-earned money to founders who promised to apply those skills too.
Let me be clear: I didn’t have those business skills when I retired from the military. That career gave me the ability to ask probing questions and to keep digging for the answers. Working with other angels (and a lot of reading) helped me develop the rest of the business understanding to ask even better questions. These days I might even spot a problem before it happens, let alone before I invest in the startup. Angel investing will make you a better investor, but only when you put in the time.
You’ll be a better person.
Angel investing has kept me challenged and fulfilled. Sure, I wrote some checks and someday I might collect on an exit or two, but in the meantime I’ve helped solve tough problems and jumpstart the economy.
My investments (leveraged with other angels and venture funds) have created jobs for literally hundreds of bright, dedicated, and motivated people. Unlike some beneficiaries of charities, founders cannot have an attitude of entitlement. They have to prove that they’re worthy of the stewardship of your money, the care & feeding of their employees, and the rewards of their customers. It takes a little bit of insight to found a startup, but it takes a lot of hard gruntwork to execute on the vision.
The nine startups that I helped have developed a better medical stent (for both cardiac and diabetic patients), allowed elders to continue to live independently and safely in their homes, and revolutionized medical radiology. We’ve learned what works in solar power and in biofuels (mostly by verifying what doesn’t work). We’ve created better materials for pressure vessels, submarines, and aircraft. We’ve found new ways to make travel planning easier, faster, and cheaper. Other founders are revolutionizing agriculture, customer service, meetings, and even education.
Better yet, Blue Startups is on its eighth cohort of startups. They’re a Top 20 American accelerator with over 80% of their 55 companies still in business. Less than $1.5M of seed funding, a lot of office support, and our volunteers, have generated another $30M of investments. Founders still have to develop their insights with hard gruntwork, but the Blue team helps them avoid most of the time-wasting mistakes.
My kind of philanthropy
Because I haven’t personally experienced an exit yet, people tease me that I’m still an angel philanthropist (giving my money away) instead of an angel investor.
They’re right. Happily, these “beneficiaries” are some of the brightest, most motivated, and hardest-working people I’ve ever seen. I know that my money is making its maximum impact to solve hard problems for millions of people.
Maybe I’ll get that money back someday and be able to help solve more problems.
This is how all philanthropy should be: not just a safety net or a handout, but a big hand up. I feel very rewarded to be part of the group.
Doug Nordman is the author of “The Military Guide To Financial Independence And Retirement” and founder of The-Military-Guide.com. He’s helped thousands of military servicemembers, veterans, and families reach their own financial independence, and he has plenty of ideas on what you’ll want to do all day.
While Doug was preparing this guest post for me, I was busy preparing two guest interview posts for…
Physician on FIRE:
Christopher Guest Post – JL Collins
An Interview with the Godfather…of FI
A quick Tuft & Needle Story
At the end of the last couple of posts, I’ve shared with you the exciting news that Tuft & Needle is now a key sponsor of this blog. I am thrilled because I use and can recommend their product without reservation and because I absolutely love the ethics behind how these guys do business.
Here’s an example, illustrated in this actual email exchange. Shawn is a long-time reader and Daehee is the CEO of T&N.
Shawn (Nov. 1)
HAPPY BIRTHDAY JIM!!!! Hope it is a great day for you.
PS, I saw that T&N will be advertising on your site since they eliminated the affiliate links. I did take your referral for Tuft & Needle beds over a year ago and I am sure glad I did. My girlfriend has some back issues from a previous car accident and this mattress has been amazing for both of us.
Jane and I are on the beach in San Clemente, Ecuador for a week before the two back-to-back Chautauquas. Not a bad b’day at that!
I’m cc’ing your email to Jordan and Daehee at T&N so they can see your comment on the mattress.
I’m thrilled it has helped your GF, and thrilled to have them on my site!
Hope her post accident issues move quickly into the past!
Shawn (Nov. 1)
I hope you two love birds enjoy every moment. It was 30 degrees with a decent frost on the Harley this morning (took everything it had to start) here in NH.
Yes, we LOVE our T&N mattress. The misses prefers a fluffy mattress and I prefer firm. Somehow this mattress works perfectly for both of us. I only wish we had bought a queen rather than the full. But that is my own fault.
Daehee (Nov. 2)
Jim, thanks for sharing us on the conversation, that’s awesome.
Shawn, nice to meet you. We’re happy to hear that you love your T&N mattress. Can you confirm your shipping address with me? We’ll get a queen-size sent out to you for a better fit.
Shawn (Nov. 2)
Seriously!? There is nothing wrong with the one we have. We just should have ordered a bigger one to give us more room.
Me (Nov. 15)
What ever happened with this?
Shawn (Nov. 15)
Jim, this was so amazing. I received the mattress yesterday! I ordered a new queen size frame that is due any day now. I still can’t believe they sent me a free upgrade. I have been promoting them for a year anyway, but now I will tell everyone.
Thank you again for writing about them and this amazing mattress. They have made a lasting impression with me and my family for sure.
Me (Nov. 15)
good to hear!
Thanks for letting me know!
Me (Nov. 15)
You continue to exceed expectations! Well done.
Any problem with my sharing this on my blog?
Daehee (Nov. 15)
That’s great! Yes, feel free to share—we’re happy to help the jlcollinsnh community. Thank you for sharing Shawn’s email in the first place so we could send him a surprise gift.