On paper, angel investing sounds like an insane proposal, right?
“Invest in this company and you have a 80% chance of losing everything, a 15% chance of getting your money back, and a 5% chance of 100X’ing your money.”
Who would take that bet?
It seems like a really bad way to make money.
However, there must be a number of reasons why some of the smartest and most successful people in the world often become angel investors. Right?
The financial incentive is critical, sure. And, the diversification aspect is crucial too. You have to believe that a company will become a business and financial success if you’re going to put your cash behind it.
But, if angel investors were solely pursuing financial returns, it’s possible that not many would exist. Anyone who has ever written a check to a founder knows exactly what I’m talking about.
In addition to the potential for financial gains, an angel investor might write a check for one, or more, of the following reasons:
- Access to Networks
- Access to Information
- Access to Education
- Access to Status
- Vanity / Reputation
- Competition
- Support of a friend or family member
- Fun!
You can think of angel investing as the process of (hopefully) generating financial returns and (most certainly) gaining access: Access to people, access to technology, access to information, access to clout… Even access to future deals.
After all, not every single investment is going to be a home run. However, the losses are even more important than the wins. Each investment that you make, regardless of the outcome, is going to help you build an expertise in the technology, category, and a network within the industry. The knowledge, perspective and connections that you develop from one deal helps you identify an opportunity in the next deal that you would have otherwise missed.
Sometimes, it takes making a bad investment to get access to the good ones.
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