Last week I was catching up with a friend and he said he could never be an angel investor as he’s too worried the investment would fail and be worthless. I offered up that most angel investments fail and it’s better viewed as charity that helps entrepreneurs. Thinking more about it, investment failure doesn’t bother me for several reasons:
- What Could Be – Investing is a leap of faith that there’s an opportunity to build a great company.
- Opportunity to Learn – Every deal is different. Every market is different. Every entrepreneur is different. There’s so much learning with each investment.
- Paying it Forward – Helping entrepreneurs is a core value for me. It’s what I enjoy doing.
- Upside > Downside – If we succeed, the return could be 10x or 100x the original investment. If we lose, the downside is only the original investment.
Investment failure as an angel is never fun but the enjoyment and potential upside outweighs the risks.
What else? What are some more thoughts on investment failure as an angel?
David Cummings on Startups 
If you take a portfolio approach, “failure” of individual companies should simply be expected. It’s part of a very, very high risk portfolio and unfortunately there will be a lot of it. The object of course is to minimize it while maximizing the upside potential. If on invested the same amount in 100 companies, and all failed but two, and the two winners delivered 100x, than you’ve doubled your money. Given that these investments are illiquid for typically 7-12 years, a double is probably below average what you would have done in the liquid lower risk market. So that could still be deemed a failure. But if 3,4 or 5 of them hit… now your talking.
Or, just spend your mental energy in the stock market, as it is likely to outperform an angel portfolio. What David describes are the types on angel investors entrepreneurs want to work with. The one’s who pretend their running a portfolio are the one’s who most entrepreneurs want to avoid.
Your list of benefits are right on, and I was going to add the portfolio addendum to your last point as well. It’s really a matter of trying to get a 10-15x out of every 8-10 investments, with a couple breaking even or better also. But the leanings and relationships built are the ongoing dividends.
If you learn something valuable, then you didn’t fail. I’m paying considerably more than an average angel investment for my kids’ college educations, and there’s as much, if not more risk of a payback from that.
We speak too often of failure when it comes to entrepreneurship and innovation. Success and failure are mindsets, not absolutes. When you “succeed” (in the conventional sense), you almost always could have done better. When you “fail”, you should be at least one step closer to success, and that’s the real goal of making risky investments. To my mind, the only absolute failure is a failure to learn.
As you note, there are many ways to get ROI from investments, even if you view it as charity (which I don’t). Knocking it out of the park is necessary on occasion, and I’m pretty certain you’d welcome that outcome every time, but it is only one way to win. I’d add several more to your list:
– working on challenges that are not routine, and always interesting
– opportunity to potentially change the world in meaningful ways (some improvements are mundane, but if they’re useful, you’ve still made the world better)
– helping others achieve more of their potential improves the community, which you also get to share in
– actively deciding where you place your bets helps create the future you’d like to see
– unlike casino bets, you actually get some measure of control over the outcomes, and influence the probability of a large win. If we can get a thrill from throwing the dice in Vegas, surely the thrill of creating something enduring from nothing and helping others to learn and succeed is 1000x more fun, even when a startup is 100% crash and burn (an extreme rarity).
If on balance, your investments lost so much of your money that you did no better financially over your lifetime than a drone working at a Fortune 500 company, which of you has had the more rewarding life? How many angel investors do that poorly?
I don’t call that a failure.