The Angel Investor Dilemma

If you ask a successful tech entrepreneur if they’ve made any angel investments, more often than not the answer is yes. Only, if you follow up that question with “have you made money”, the answer is almost always the same: no. Yet, many are still interested in angel investing as they see value in their existing investments, want to help entrepreneurs, and, of course, want to make out-sized returns.

I’ve found that after successful tech entrepreneurs scratch the itch of making a few angel investments, they don’t make any more investments even though they are casually interested in doing so. After probing why they haven’t made more investments, it always comes down to one main reason: they haven’t made any cash on the existing investments because they haven’t had any exits and the existing investments are illiquid.

Angel investments often take 7+ years to see a return, if any comes at all. So, after making a few investments, and not having any liquidity for a few years, angel investors get cold feet and don’t write more checks. Add in challenges like having to invest more money to maintain ownership positions for future financings (assuming pro-rata rights are respected by subsequent investors) combined with continued uncertainty about the outcome, and it’s clear that angel investing is much less glamorous than it appears.

Angel investors have a dilemma in that there’s no cash flow and an extended horizon to see any return, as well as no liquidity. Yet, there’s such great potential, both to help an entrepreneur and make a difference. Angel investing is difficult, very difficult.

What else? What are your thoughts on the angel investor dilemma of an illiquid financial model with a long-term horizon combined with the opportunity to help entrepreneurs change the world?