Are You Rich? Invest In Tech
f you’re a millionaire who’s grown weary of “traditional” investments, the timing could be right to take it up a notch by investing in Utah-based businesses, particularly forward-thinking companies leading the way in cutting-edge tech.
There are numerous reasons to invest in Utah’s ecosystem. For starters, unlike standard investments where you’re virtually disconnected from your money, angel investing can be deeply rewarding and satisfying. You get to be involved. You get to play the game. You have a hand in improving conditions, and, most importantly, you have the opportunity to leave your mark. Ask any skilled angel, and they’ll say the old way of investing doesn’t hold a candle to angel investing.
By investing your money in businesses, the local, national, and even global impact of your investment can be huge. Your investment might help create jobs, stimulate the economy, and improve people’s lives for years to come. Angel investing isn’t about being bored with your current investments and seeking outside stimulation; it’s about making a difference and making a profit while doing it. It’s a win-win from every angle.
“I’ve come to believe that if you’re smart about where you invest, and you invest in good operators and deals that are well-structured, over time you generate higher returns than public equities,” says Jeremy Andrus, an angel investor with more than 100 private investments in his personal portfolio.
It’s Not As Risky As You Think
Though it may sound like a great way to risk all of your money, the answer, as always, is diversification. “If you’re doing early-stage tech investing, startups, it’s critical that you consider your own portfolio strategy and work with institutional funds or venture funds who can support that diversification as well as do your due diligence, your homework on the companies,” says Sid Krommenhoek, Managing Partner at Peak Ventures.
Because most of your investments will fail, do it through a portfolio, so even if you have nine losses, you can have one massive gain, he advises. “The truth with startups is that most fail, but those that do [succeed] succeed massively. Not 10x, but 100x returns.”
John Richards, Angel Investor and Founder of the Center for Entrepreneurship & Technology at Brigham Young University says that newly liquid millionaires and billionaires should be cautious and move slowly. “Many newly liquid wealthy entrepreneurs think they can be master angel investors just because they were successful with an entrepreneurial venture. The skills do not translate well for many people. It is not uncommon for a newly wealthy individual to lose significant money (millions of dollars) investing in too few ventures for too much per venture in their first year.
“Invest in a diverse number of deals with relatively small investments to start. After a year or so, the ones that perform well out of the first batch, double, triple, or quadruple down by investing in subsequent investment rounds for those company. Example: If I had $500,000 to invest in startup ventures, I would do $25,000 in ten ventures. Then, after some amount of time, I would know which of the 10 are the best two. I would put $125,000 each into the top two if and when the company needed it.
“The above example is the best way to get high, acceptable angel investment returns and to avoid large overall losses on a venture portfolio. Institutional investors practice in this way. Follow this advice. If you think you are a special snowflake and will buck the stats, you will indeed lose your money and have negative returns.”
There Are Even Tax Advantages
One of the lesser known perks of angel investing is the tax advantage, according to Davis Smith, Founder & CEO of Cotopaxi. Mr. Smith turns to Utah native and Brigham Young University graduate, Jason Woolsey, for tax advice when investing in Utah-based companies. “As investors consider investing in startups, one crucial consideration to take into account is whether the company is a Qualified Small Business (QSB), thus potentially providing for the investment to be treated as Qualified Small Business Stock (QSBS),” he says.
“A company may be a QSB depending on a number of requirements, including being a domestic C-corporation, having less than $50 million in assets at the time of investment, and being engaged in a qualifying business. QSBS is an incredibly powerful tool that not only provides for cash injections into early-stage companies but also provides a financial incentive for investors by way of tax exclusions.
“After an investor receives stock from a company in exchange for services or cash (cannot be purchased on a secondary or other market) and has held the eligible stock for at least five years, upon disposition the investor can exclude from federal taxation (state rules vary) up to 50, 75, or even 100 percent (depending on date of investment) of the greater of 10 times their basis in the investment or $10 million. This provision creates an opportunity for a great deal of planning and other strategies, which can provide substantial benefits to investors in Qualifying Small Businesses.”
How to Get Your Start
If you didn’t grow up in tech, Mr. Andrus doesn’t advise making your first tech investment alone because you don’t know the right questions to ask and, if you succeed, it’s because you got lucky. “Luck is nice, but it’s not a repeatable investment skill.” Instead, the former CEO of Skullcandy and current CEO of Traeger Wood Pellet Grills got his start by co-investing with other, more experienced investors.
Mr. Andrus says you want multiple minds around a deal. “A lot of time, I partner with venture firms, and they do a lot of the research for me,” he says. “Utah is such a great place to invest in right now, especially tech. If you figure out how to get good at it and find good partners, it’s not only a ton of fun, but you can make a lot of money. Get yourself into a network of smart investors. Find people who like to invest in the things you do. Spend time together and talk a lot… It’s about your willingness to track investments carefully and see what things make them work and what things cause them to fail.”
There’s no substitute for experience and putting your own money at risk, says Mr. Andrus. It’s the only way you learn. “Investing has a lot of pattern recognition. When you invest with people who’ve invested a lot, you see what they look for in investments based on their experiences.” Not to mention, “When you lose money, you learn from your lessons quickly.”
Of course, there are business types and asset classes Mr. Andrus understands well. “In those investments, I’m fine to invest myself or partner with other people because I have the capability to assess the strength of the entrepreneur.” As a tech investor, you have to be careful about straying too far from what you understand, he says.
Resources For The New Angel Investor
If you’re just getting your start, there are several resources that can help you get on the ground quickly. Mr. Smith recommends the tech investing blog found at avc.com. “The author is Fred Wilson. He is a Wharton guy in New York and one of the most respected and well-known VCs in the country.”
Mr. Krommenhoek has some suggestions as well. Feld.com by Brad Feld for one. “He’s someone I know personally, and I read his blogs and books that he’s written on startups.” Another is Mark Suster at Upfront Ventures who shares his thoughts on startup and investing on the blog bothsidesofthetable.com.
As for newsletters, Mr. Krommenhoek recommends subscribing to those by Crunchbase, PitchBook, and Mattermark Daily. “If you’re reading those, you’re up-to-date on industry trends,” he says.
Mr. Richards says that aspiring angels need to become devotees of lean startups by reading The Startup Owner’s Manual by Steve Blank and Bob Dorf. “Never invest in anyone not practicing lean startup principles.”
As an angel, you must learn how to measure traction in a startup, such as increases in and good quality revenue, advisors, team members, other investors, users, etc. And when you do get started, start small, then double or triple-down when the venture has demonstrated real traction, which usually means growing revenues, he says.
For the novice angel investor, co-investing is where it’s at. “Invest alongside others—never as a lone wolf. This means you should get started in crowdfunding through Wefunders.com or get in touch with local angel groups, like Park City Angels, Salt Lake City Angels, or Utah Angels 2 (ua2.co). Alternatively, become a limited partner investor in a local seed fund like Peak Ventures, Kickstart Seed Fund, or Peterson Ventures.”