Why Would Anyone Invest in Startups?

I love investing in startups. So do my partners at Social Leverage Gary and Tom.

I had no idea I was going to invest in startups until I made my first investment in my mid 20’s. I started angel investing during my first job as a stockbroker in Phoenix, Arizona when I invested in The Gripp, a company whose founder I went to pitch stocks. It was a small investment, mostly my time. I got so excited about the opportunity I left the brokerage business to work at The Gripp. We crushed it (and made every mistake possible) and I never looked back at the corporate job world.

I eventually moved on from The Gripp, but I have never stopped angel investing and starting my own companies (Lindzon Capital Partners, Wallstrip, Stocktwits, Social Leverage).

It’s been hard work, but very profitable and fun.

I was reading this 5 year old post by Andy Recleff on Angel Investing (thanks Semil) and was amazed by how bad the returns are for angel investing and venture funds. For instance:

If the average VC fund barely makes money, and seed investments represent even less compelling opportunities than the ones pursued by venture capital firms, then the typical return for angels must be atrocious. Even Ron Conway’s second angel fund, which had the good fortune to invest in Google (a 400x cost winner), only broke even (that means close to a 0 percent IRR)!

I like to invest in startups that have low technical risk, so according to Andy, I should have literally NO chance at success:

The premier venture capital firms know the best investments have high technical risk and low market risk. Market risk causes companies to fail. In other words, you want companies that are highly likely to succeed if they can really deliver what they say they will. Unfortunately, consumer Internet companies don’t follow that pattern. They usually have low technical risk and high market risk. There is very little chance they can’t deliver their product. The big issue is whether the startup’s product is of value to a large enough audience.

Based on Andy’s data and opinion… the reason I have succeeded as an individual angel and with Social Leverage is our ability to pick leaders and ideas that overcome market risk.

My success according to Andy is a miracle!

I can live with that, but I think there are a lot more intangibles in being a successful angel investor and defying the odds.

My strongest batch of investments came in 2006-2010 with Wallstrip, Lifelock, GolfNow, Tweetdeck, Betaworks, Buddy Media, TubeMogul, Ticketfly, Bullet Time Ventures (Twilio, Sendgrid, Uber), eToro …and included passes on Twitter and Zynga.

In looking back there was a confluence of low valuations (market crash), being in New York City because of Wallstrip, and the birth/massive growth of Youtube, Twitter and Facebook as platforms to hitch to for growth.

I think the data is important and Andy’s article is excellent, but I will not let the data or Andy scare me out of doing what I love doing the most.

In the end, showing up remains the most important part of winning.

Also published on Medium.