❤️🔥 Here’s how much I have(n't) made angel investing
Plus: Stopping healthcare's tapeworm with zero-inflation healthcare
Happy Friday!
Two weeks ago, I wrote about why I hit pause on angel investing. Yesterday, I got an email from the law firm of a company I invested in 10+ years ago that has raised $100M+. The company is getting acquired, and they want me to sign some docs.
Unfortunately, my shares have been diluted over time and converted from preferred to common. While a VC who backed them just a few years ago will make money from this acquisition, I will get $0. Zero.
This is why I am no longer angel investing. It’s not just that early investors often get the short end of the stick while later-stage VCs reshape the cap table to their advantage. It’s that we are often forgotten and get this news from lawyers and not the CEO.
Anyhow, I promised to share an update on my portfolio's performance—something not enough (if any) investors do. It took me a little longer to do this analysis, but here ya go:
🗑️ I've lost some or all of my money on 38% of my angel investments
The "rule of thirds" is a rule of thumb in venture capital that suggests a well-diversified fund will have one-third of its portfolio go to zero, one-third break even, and one-third generate all the returns.
So far, I’m on track with the first bucket.
🛍️ 32% of the companies have been “acquired”
A big learning for me as an investor is that many acquisitions—even those covered positively in the press—sadly return nothing to early investors or employees.
69% of my portfolio companies that have been acquired returned less capital than I invested
13% were sold in exchange for stock in the acquiring company
Only 1 in 4 exits have actually been a positive return
💸 I've made money on 8% of my angel investments.
Just four of the companies have been profitable investments so far. The returns on these range from 5x to 21x realized return, which sounds high but keep in mind the high-risk nature of this asset class (meaning a higher return is required), along with the illiquidity (meaning your money is tied up for a long time, much longer than other investments like real estate or public stocks which can be sold).
Looking at my entire portfolio, I’ve seen a $0.31 return for every dollar invested. Hopefully that changes, but for now, I’m deep in the red.
🏦 Here’s how this compares to my single stocks
Over the years, I’ve purchased stock in about a dozen companies on the Robinhood app. Some have tanked (ahem, Teladoc, which is down 94% 🫠), but unlike startups, none have gone to zero.
Another benefit of public market investing is that it’s liquid: I can exit at any time. Of course, while the risk is lower for public companies, so is the expected return. The highest return I’ve seen from a public company is 5.7x compared to 21x for a startup.
The truth is, I won’t know the real performance for many years…
About half of my angel investments are still active. I would need four of them to return 10x their investment in order to break even overall.
Do I think that can happen? It’s unlikely. While about a dozen of the active companies are on very promising trajectories and may have a lucrative exit, many have gone through recaps, down rounds, or mergers that drastically diluted my ownership. But if any of them do get acquired, I just hope to hear it directly from the CEO and not a lawyer.
🎧 New podcast episode
The average American family spends over $24,000 a year on healthcare, and costs continue to rise faster than inflation. Why can't we create a healthcare system that delivers more value for less money?
In this conversation with Ann Somers Hogg of the Clayton Christensen Institute, we explore the concept of "Zero Inflation Healthcare" and uncover why traditional health insurance models continue to drive costs up. Ann Somers breaks down why many InsureTech startups initially struggled to disrupt incumbents and how a new approach to business model innovation could finally tame runaway healthcare costs.
We cover:
🌟 The "optimal care business model" that could help transform healthcare
📊 Why InsureTechs like Oscar and Clover struggled initially against incumbents
🧰 If and how insurance companies can fix their reputations
💰 Why health insurance companies' "spend more to make more" profit formula fails to incentivize the desired outcome
🔄 How regulations create barriers to disruptive innovation in health insurance
🛑 Why Haven (the Amazon-Berkshire-JPMorgan venture) failed despite its resources
💡 How the "Jobs to Be Done" theory applies to healthcare choices
Tune in wherever you listen to podcasts! Apple | Spotify
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It's poker for sure. I have always worked on the very rough principle - If you make 40 x $25k bets ($1m invested) in companies under $10m valuation (never possible), you need 1 investment to make it to $5bn valuation to make a "Good Return". 39 can go to Zero, you can double down on 2 that go to $1bn etc but when you hear of people being Angels in Uber, Stripe, Airbnb, Flexport, Coinbase etc etc it does happen. FWIW - Bitcoin at $104 a coin has still been my best return. :-(
This article---like all of your work---makes the implicit explicit, and that takes guts. I’m deeply grateful for your clear-as-a-bell voice in this world of smoke and mirrors.
It brought up two reflections for me:
First: I believe every dollar invested in my companies deserves to be treated with respect and care. When I transitioned from my last company to this one, I personally called every single investor---angels included---many of whom followed on into this new venture. We raised our current round in three weeks, all from people who had invested before. Reputation matters. I’m not perfect---far from it!---but I do know what it looks like to treat people fairly and well. A phone call doesn’t feel like too high a bar. I’m dismayed, even ashamed, by the selective amnesia I see in some fellow founders.
Second: How do we keep encouraging risk-taking, innovation, and first-time founders---without losing our shirts? I do some angel investing and mentally earmark it as “support” capital. I back a lot of women and underrepresented founders, but I don’t expect a return. Very small scale. It’s my way of paying forward what others did for me.
As always, I appreciate you and your sharp, generous mind!