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Angel investing?

中国日报网 2013-09-10 11:01

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Reader question:

Please explain “angel investing”, as in this sentence: He has also been doing angel investing in technology start-ups.

My comments:

In other words, he’s been investing in technology start-ups as a venture capitalist.

A start-up, you see, is a company in its formation stages, a time when it usually needs funding the most. It’s up and coming but very young and unable to hold its own yet, and so therefore investing money in a start-up is risky business, to say the least.

That’s where venture investors come in. They are investors who make investing in risky start-up a business. They assume the risks and ask for hefty returns if any start-ups make it big – in the form of acquiring shares of the companies.

Angel investing?

Essentially, people say angel investing when they want to refer to their investors as angels. That’s just when they choose to think very well of their investors who kindly offer their money and support.

When they don’t think very well of their investors, they, well, talk of them as vultures if you know what I mean.

Anyways, angel originally is a celestial being, someone unreal really, that serves as a guardian of people and places. Angel investors are kind of looked at in the same way. Usually, you see, angel investors work alone and are usually not into investing with an eye (or both eyes, I shall say) solely on the potential profits. Angel investors are just rich individuals who want to make good use of their extra money by helping someone developing a business of his own. In a sense, they almost serve more as a guardian, as in guardian angel, than as a businessman. In other words, they’re not the usual type of venture capitalists who are in for the money and money alone. They’re professionals who do it strictly as a business.

Angel investors, on the other hand, may be investing in your company simply because he likes your character and want to see you succeed. That is to say, profit making may be of secondary consideration.

That’s me being me, putting it perhaps a tad too nicely. Perhaps I shouldn’t say profit making is of secondary consideration to these angels, some of whom would, upon hearing this, rise up and retort with indignation: “Of course, we want to make a profit, too!”

But, you know what I mean, I mean no harm.

Okay, why don’t we read a few media examples to get further enlightened on the subject:

1. Kevin Hartz is sitting this one out.

Sure, Hartz is busy with his day-job as CEO of online ticketing startup Eventbrite, but it’s not a time management thing that keeps him from his usual angel-investing habit. It’s more a money management thing. Hartz doesn’t like to invest his when there is so much sloshing around Silicon Valley.

The last new investment Hartz made was more than a year ago. At the time it was a little company no one had heard of called Pinterest. You’ve probably heard of it now. Hartz also made early bets on Airbnb, Flixster, Palantir, Trulia and Yammer among others. He’s mobbed up with the PayPal mafia, not as a former colleague, but again, because he was an early backer. Hartz is making follow-on investments in his current roster of startups, but he’s not looking to do anything new — it’s just too expensive.

“We don’t know where we are in this cycle,” Hartz says from Eventbrite’s San Francisco headquarters. “We can’t know how much longer this abundance of capital will last, but I don’t want to be a part of it. When I see a massive number of new investors and carpetbaggers coming in, it’s time to get out.”

Hartz doesn’t use the word bubble; it’s more complicated than that for him as a guy who sits on both sides of the money equation as an investor and an entrepreneur. It’s more a winter is coming view of the startup world, especially for the consumer internet on which Hartz focuses. His advice: Get prepared for a chill to set in.

As an investor Hartz points to the usual signs of too much money-chasing deals. The billboards on highway 101 between San Francisco and Silicon Valley touting startups no one has heard of. The bus stop signs in tech-heavy locales like Mountain View and Palo Alto advertising scads of engineering jobs.

“Everyone is competing for the same people, going after the same real estate, the same support services,” Hartz says. “The natural resources of the startup world are getting scarcer and scarcer, and the cost is getting higher and higher. It’s all an outgrowth of an abundance of capital.”

- Angel No More: Why One of Silicon Valley’s Savviest Investors Has Shut His Wallet, Wired.com, October 12, 2005.

2. I began studying angel investing returns about 10 years ago as a result of a problem I couldn’t resolve: The investing world seemed certain that angel investors were rubes. Conventional wisdom dictated that they made reckless investments in very early-stage ventures mostly doomed to fail. And whenever they might come close to succeeding, savvy “professional” investors would just swoop in, cram them down, and win the real returns. In addition, angels were up against a selection problem: All the best entrepreneurs and opportunities would naturally gravitate to the best venture capital funds, leaving only the “scraps” for angel investors.

So which is it? Are angel investors just unwitting philanthropists or legitimate entrepreneurial investors?

Through research backed by the Kauffman Foundation, NESTA (a UK-based entrepreneurship foundation), the University of Washington, and Willamette University, I’ve compiled the largest data set on angel investor financial returns that exists. The angel investors I was spending time with didn’t seem so naïve or incompetent. While not professional investors, most angels are very successful in their own right, overwhelmingly as a result of their own entrepreneurial endeavors. Their firsthand knowledge of creating new businesses and new markets seemed quite relevant to successfully investing in other entrepreneurs working to do the same.

The best estimate of overall angel investor returns from this data is 2.5 times their investment, though in any one investment the odds of a positive return are less than 50 percent. This is absolutely competitive with venture capital returns.

- Angel Investors Do Make Money, Data Shows 2.5x Returns Overall, by Robert Wiltbank, TechCrunch.com, October 3, 2012.

3. At 17, he’s a tech whiz, he’s rich — and he can even offer some advice on how to raise your kids.

Teenage programmer Nick D’Aloisio’s decision to sell his news application Summly to Yahoo for what’s rumored to be a massive payout has turned him into a media sensation. The sale caps a short but successful career at Apple Inc.’s vast app store, where hundreds of thousands of pieces of software compete for the attention of smartphone and tablet users.

In an interview with The Associated Press on Tuesday, D’Aloisio said his computer skills were self-taught, explaining that he started by mastering movie-making software before tackling programming languages.

He said his parents were “very enthusiastic and supportive.” Asked what advice he’d give couples hoping to raise their own wunderkinds, he urged them to let their children explore their own paths — be it computer science or drama.

“If there’s a natural curiosity, that’ll lead to, eventually, some success,” the teenager said.

D’Aloisio said he was thrilled to be working for a “classic Internet company” — Yahoo! Inc. is older than he is — and he laughingly dismissed a reporter’s suggestion that his friends might be jealous.

“All my friends have been very supportive,” he said.

He noted that the publicity over Summly had been building for more than a year, meaning he and those close to him had had time to adjust to the outside attention.

As with its other recent acquisitions, Yahoo didn’t disclose how much it is paying for Summly, although British newspapers suggested the deal’s value at several million dollars. D’Aloisio had already received investment from several sources, including venture capitalist backer Li Ka-Shing.

Asked what he’ll do with the payout, he responded with serious answers unbefitting of an adolescent. He said the money was being kept in a trust until he turns 18, and he didn’t seem interested in talking about what he’d buy for himself for his next birthday.

"I’d like to keep it safe. Bank it .... If I was to do anything it’d be angel investing,” said D’Aloisio, who is slim with dark brown hair and bears a passing resemblance to Josh Radnor, the actor who plays main character Ted in the TV sitcom “How I Met Your Mother.”

- British teenage whiz strikes deal with Yahoo, Associated Press, March 26, 2013.

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Go to Zhang Xin's column

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About the author:

Zhang Xin(张欣) has been with China Daily since 1988, when he graduated from Beijing Foreign Studies University. Write him at: zhangxin@chinadaily.com.cn, or raise a question for potential use in a future column.

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