Wikipedia defines an ultra high-net-worth individual as someone with more than $30 million of assets. As an entrepreneur out raising money from angel investors, it’s important to consider their motivations, especially if they’re in the ultra category.
Consider the case of the ultra high-net-worth angel that puts in $100,000 for 3% of the startup. The company does well, raises more money such that the 3% stake is diluted down to 1.5%, and eventually has a nice exit for $50 million (exits of that size are rare outside the Valley). That $100,000 was turned into $750,000, then taxes are taken out, and the investor is left with ~$600,000. Turning $100,000 into $600,000 over a five year period doesn’t move the needle for the ultra high-net-worth investor. It doesn’t change their lifestyle, doesn’t buy them a jet, etc. Add in the fact that they need to make 10-20 of these angel investments to get some that have nice wins and the net result is a return on investment that’s not worth it when adjusted for risk and lack of liquidity.
So why do they do it? Three main reasons come to mind:
- Fun – Entrepreneurs are an enthusiastic group that want to change the world. It’s fun to hang out with crazy people that believe they can conquer anything.
- Lottery Ticket – If one does pop and turn into the next Google or Facebook, the return will be material and life changing.
- Give Back – The most common reason is that these investors want to help the next generation of entrepreneurs and give back by helping both financially and in a mentoring/advising capacity.
Entrepreneurs would do well to consider angel investor motivations, especially with ultra high-net-worth individuals, as even a good return on investment financially won’t do much for their personal balance sheet.
What else? What are some other thoughts on the ROI of angel investing for ultra high-net-worth individuals?