A common adage in angel investing is “invest an amount that you don’t care about losing.” Now, it isn’t that you want to lose any money as cash is cash, whether it’s $10,000 or $100,000. Yes, angel investing is risky, but there’s also no liquidity for an extended period of time, if ever. So, if you’re going to invest $25,000 into a startup, it isn’t like putting $25,000 into the stock market where if you change your mind you can take the money out at the prevailing price.
No, once the money is invested, not only is there no timeline to be able to get it back, you also have to put in more money to maintain your ownership position, assuming pro-rata rights (I’ve always heard that you should save $3 in reserve for every $1 you invest). Once you’ve invested in the startup, it’s truly like the money is gone, and the lack of liquidity is the main culprit.
While lack of liquidity is a big challenge, angel investing is much more interesting and rewarding than making traditional investments in places like the stock market. The opportunity to help entrepreneurs change the world, develop a mentor/mentee relationship, and invest in the next generation of leaders provides its own value. Access to cash matters but there are intangibles that are difficult to measure.
The next time you think about making an angel investment, remember the lack of liquidity challenge and make sure that the money isn’t needed for a long, long period of time.
What else? What are some other thoughts on lack of liquidity with angel investing?
David Cummings on Startups 
Lack of liquidity is definitely something to keep in mind…but if you have excess capital to invest…the potential returns and excitement of being part of a startup far outweigh that of purchasing shares from the open market in my opinion. Definitely not suitable for anyone looking for short term gains though.
Another reason the best investors know and like the industry where they invest. If they can provide influence and be a force multiplier, it helps the overall success, possibly an earlier valuable exit with less dilution for everyone and more value. It is harder to commit to a long relationship if the industry and team are not appealing to the investor!
Many first-time angels also don’t understand how much total capital may be needed to appropriately manage risk in this asset class.
The bottom-line is that if you begin angel investing by investing $25,000 into one startup, then you have initiated a process that may require you to invest up to $500k to $1 million to maximize your chances of a profitable outcome.
Two reasons for this:
1. you need to hold back another $75k for future rounds in that company, to maintain your position.
2. you’ll need to invest in another 9-10 startups to spread your risk / give yourself a decent chance of hitting a home-run… to pay for the 80-90% of companies that never return a liquid gain (or worse).
This is how successful super-angels like SV Angel (Ron Conway) invest, for good reason.
Thank you for publishing daily. We need more straight talk about startups, especially in the South.