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Just one $25 million payday from the sale of a startup will more than cover an Angel investor’s loss from a hundred dud $25K investments — which is a loss of ju

by coryl 15y ago

Just one $25 million payday from the sale of a startup will more than cover an Angel investor’s loss from a hundred dud $25K investments — which is a loss of just $2.5 million. The risk to reward ratios are off the charts, which is why so many want to be Angels. Sure buddy. A $25m payday means you have an 8% stake in a startup worth more than $300m. And as we all know, $300m+ acquisitions happen every day, right? But hey, who needs to understand business or technology when you're a writer.

ericd 15y ago
Your sarcasm is misplaced. That scenario doesn't need to play out very frequently at all to make that math work out very well in your favor. Those specifics aren't quite right, but it demonstrates a valid point. If 1/500 are massive hits, you're still ahead. His point doesn't quite fit with his theory that everything's a big talent acquisition conspiracy, though, since those are usually much, much smaller. Unless that was your point?
- ookblah 15y ago
  But I feel like it isn't 1/500. Maybe on the order of like 1/5000... Think about how many companies apply to just one program like YC at any given SEASON. And this is just one program. When you factor in the other ones like TS, AP, 500 Startups how many years did it take for the first Heroku to come out. And then these guys are considered the "best" at picking and cultivating startups. Think about all the crap other angels have to probably go through. They might be ahead but I don't think it's that easy.
  - ericd 15y ago
    Sure, for angels who aren't very prolific, it's a lot more variable. I should have mentioned that I was thinking about it from an incubator's perspective. Normal angels aren't investing in a uniform random manner, though, and I have to assume that that helps their odds. Lending their money and their name to the company can help the odds as well. Heroku was founded in 2008, years before 500 Startups and many of the other incubators, so it didn't take that long. (YC was founded in 2005)
    - rdl 15y ago
      The bigger issue is access to dealflow -- if you're a no-name angel, with no particular accomplishments, connections, etc. you're not even going to get entrepreneurs to talk to you. Even if you mail a top company a $50k check and investment offering, it will probably get rejected. If I had $1mm to invest and got to put it into exactly the companies I wanted every year, I could probably get great returns, but for a random dentist from Oklahoma, he'd be better off just buying AAPL stock.
meterplech 15y ago
I am honestly not sure, because the author is using some serious fuzzy math, but I don't think that's what the article is saying. 100 dud 25k investments means a loss of $2.5 million. I think it is saying that if one company you invest in sells for $25million and you have a 10% stake you have covered your $2.5 million loss on 100 bad investments. That's clearly missing the point that a 25k investment is pretty much never going to grant you 10% of a startup these days... When you factor in dilution/etc... the risk/reward ratio gets a little less obvious.

by coryl 15y ago

ericd 15y ago

Your sarcasm is misplaced. That scenario doesn't need to play out very frequently at all to make that math work out very well in your favor. Those specifics aren't quite right, but it demonstrates a valid point. If 1/500 are massive hits, you're still ahead. His point doesn't quite fit with his theory that everything's a big talent acquisition conspiracy, though, since those are usually much, much smaller. Unless that was your point?

ookblah 15y ago
But I feel like it isn't 1/500. Maybe on the order of like 1/5000... Think about how many companies apply to just one program like YC at any given SEASON. And this is just one program. When you factor in the other ones like TS, AP, 500 Startups how many years did it take for the first Heroku to come out. And then these guys are considered the "best" at picking and cultivating startups. Think about all the crap other angels have to probably go through. They might be ahead but I don't think it's that easy.
- ericd 15y ago
  Sure, for angels who aren't very prolific, it's a lot more variable. I should have mentioned that I was thinking about it from an incubator's perspective. Normal angels aren't investing in a uniform random manner, though, and I have to assume that that helps their odds. Lending their money and their name to the company can help the odds as well. Heroku was founded in 2008, years before 500 Startups and many of the other incubators, so it didn't take that long. (YC was founded in 2005)
  - rdl 15y ago
    The bigger issue is access to dealflow -- if you're a no-name angel, with no particular accomplishments, connections, etc. you're not even going to get entrepreneurs to talk to you. Even if you mail a top company a $50k check and investment offering, it will probably get rejected. If I had $1mm to invest and got to put it into exactly the companies I wanted every year, I could probably get great returns, but for a random dentist from Oklahoma, he'd be better off just buying AAPL stock.

meterplech 15y ago

I am honestly not sure, because the author is using some serious fuzzy math, but I don't think that's what the article is saying. 100 dud 25k investments means a loss of $2.5 million. I think it is saying that if one company you invest in sells for $25million and you have a 10% stake you have covered your $2.5 million loss on 100 bad investments. That's clearly missing the point that a 25k investment is pretty much never going to grant you 10% of a startup these days... When you factor in dilution/etc... the risk/reward ratio gets a little less obvious.