David Cummings on Startups

Ultra High-Net-Worth Angel Investors Require More Than ROI

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David Cummings

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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?

Comments

4 responses to “Ultra High-Net-Worth Angel Investors Require More Than ROI”

  1. zaoyang Avatar
    zaoyang

    Other motivations include market knowledge, expanding the network, etc.

    Reply
  2. Seth Barnes Avatar
    Seth Barnes

    They see the investment in the context of their portfolio and are looking for a targeted rate of return for the portfolio. 6X may not move the needle, but if you hit your goal overall, you’re happy.

    Reply
  3. John R Naugle Avatar
    John R Naugle

    David, I most like your third reason most; to “Give Back.”

    Your post reminded me of the line in the Prayer of St. Francis:
    “For it is in giving that we receive.”

    I once did a study on reciprocity and learned there are three types—

    Balanced Reciprocity : Giving with the expectation of receiving
    Negative Reciprocity: Taking without the interest of giving
    General Reciprocity: Giving without the expectation of receiving

    To me, the greatest inspirations in human history are those who excelled in the ‘General’ category (like Gandhi & King). Thomas Jefferson elaborates on where our giving motivations may originate: “These good acts give us pleasure, but how happens it that they give us pleasure? Because nature hath implanted in our hearts a love for others, a sense of duty to them, a moral instinct, in short, which prompts us irresistibly to feel and to succor their distresses.”

    It is healthy that we ask ourselves why we give. Yes, ROI and Balanced Reciprocity may have their place, but they are second when compared the pure forms of giving and serving. These other passages have helped me to cultivate the “Give Back” perspective…

    Dr. King stated:
    “Everyone can be great
    because everyone can serve.”

    Coretta Scott King stated:
    “There is a spirit, a need, and a servant
    at the beginning of every great human advance.
    Every one of these must be right for that
    particular moment of history, or nothing happens.”

    Franklin D. Roosevelt stated:
    “As Americans, we go forward,
    in the service of our country,
    by the will of God.”

    George Washington Carver stated:
    “It is simply service that measures success.”

    Abigail Adams (1744-1818) stated:
    “If we do not lay out ourselves
    in the service of mankind
    whom should we serve?”

    Albert Einstein stated:
    “The value of a man resides in what he gives
    and not in what he is capable of receiving.”

    Leonardo da Vinci stated:
    “I am never weary of being useful
    in serving others… I cannot do enough.”

    Rabindranath Tagore stated:
    “I awoke and saw that life was service.
    I acted and behold, service was joy.”

    Lilla Watson, Aboriginal elder, stated:
    “If you come to help me,
    you are wasting your time.
    But if you have come because
    your liberation is bound with mine,
    then let us work together.”

    Tom Hurley stated:
    “We live in extraordinary times. Around the world we face systemic and deep-seated challenges in virtually every field. At the same time, in part because of these challenges, we are coming to see ourselves, one another, and our home planet in new ways. We have an unprecedented opportunity to realize age-old dreams of abundance and recreate our institutions in the service of all humanity and life.”

    Deepak Chopra stated:
    “The fastest way to your own happiness
    is to make another happy.”

    Mahatma Gandhi stated:
    “The best way to find yourself
    is to lose yourself
    in the service of others.
    Who are true lovers of humanity?
    Those who, forgetting themselves,
    bring sunshine to the lives of others.”

    Reply
  4. spotmagicsolis Avatar
    spotmagicsolis

    Just do it.

    Reply

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