Groove Capital's founding partner on maximizing the upside to investment risks.
Many people choose not to angel invest due to a fear of losing everything. It’s a fair concern; angel investing is risky, and one should not do it if they can’t afford the losses. But what if there was a way to invest where you couldn’t lose? What if you could zero out your chances of losing everything, leaving only the upside?
With the right strategy and mindset, I think that’s possible. Let me show you how.
In the following, you’re going to make a hypothetical $100,000 investment in a Minnesota-based technology company, and I’m going to show you how to get $100,000 in value from the process, regardless of the performance of your investment.
Before jumping into this exercise, there are a few caveats. First, if you only have $100,000 to invest, you need to spread it out—put $10,000 into 10 startups; portfolio strategy works. Secondly, angel investing is a team sport. Angels generally work together in groups to identify startups and founders who have a demonstrated ability to capture a compelling market opportunity. Now, back to your new investment.
Assuming you’ve invested in a qualified business that has been approved by the Minnesota Angel Tax Credit program, your $100,000 investment will net you a $25,000 tax credit in your annual state filing…$75,000 to go.
When you angel invest, you’re often doing it with other high net worth individuals; this may include fellow business owners, C-suite executives and successful entrepreneurs. This is especially true when you invest as a part of a group, like the Groove Investment Group. When movers and shakers get together amazing things can happen: business deals get done, tips on other investments are shared, and real value is generated for your business and/or personal finances. Give it time and you’ll receive $25,000 in value simply by putting yourself into a new stratosphere…$50,000 to go.
By the time we finish our formal education, much of what we learn is done on the job. Specialization leads to a rich understanding of a specific market, but it may also limit one’s exposure to emerging markets, models, and technologies. This next $25,000 chunk I would consider the cost of continuing education. Startups are messy and highly uncharted. As an angel investor, you may get asked to help the entrepreneur through things that neither of you know much about. Multiply this learning across your portfolio and you’ll end up with a PhD in market theory and survivability. Applying your newfound knowledge to your day-to-day work responsibilities and you’re looking at a measurable ROI…$25,000 to go.
This last $25,000 is a little squishy, but you really never know what type of impact your investment is going to create. Case in point, my failed startup resulted in a $25,000 loss to two local angels in 2013. That failure was the primary motivation for me to co-found BETA and Twin Cities Startup Week. Both organizations have either directly or indirectly created opportunities for the very same investors to invest in many other Minnesota-based startups, who have a leg-up, thanks in part to the resources created by those two organizations. What they lost ultimately paid dividends for them, and for this community.
And there we are, $100,000 in value. Congrats! By taking advantage of tax savings, investing in yourself, and leveraging your newly created network, you will have successfully removed the risk of losing everything, while leaving the most exciting part of startup investing—the upside!
Yes, this is a rosy view for something that has material risks involved. But the point is that, despite what your financial advisor may be telling you, angel investing is not a win or lose game. When you do it right, and when you do it with others, it’s less risky than you might think and abundantly fulfilling.