About four years ago, a client brought the idea of investing in an early-stage technology company to Lance Paddock, CEO of Thompson Creek Wealth Advisors in Baton Rouge, La. It was the beginning of a roller coaster ride.

“We talked about whether the company can survive,” Paddock recalls. “Will the opportunity end up being hugely profitable? There were several interesting partnerships that could have rolled out the technology on a big scale, and then they rolled it out but didn’t really drive the sales, so the technology wasn’t in products all over the country. Sales were slow and they were burning through cash.”

Then the investment turned around. “Out of nowhere, from the investor’s point of view, a huge company decided to make this technology the core of all their retail outlets all over the country,” Paddock says. “The returns could be truly massive if this rolls out the way we think it will.”

That’s the ideal in angel investing: an investor contributes seed money to help a company that is short on capital get moving on the road to success. But there’s no way to know in advance, of course, if the company will follow the predicted path.

Paddock says he brings value to the situation “by helping the client think through it, looking at the numbers and giving him realistic appraisals.”


Clients with an interest in angel investing have a lot of company. The Center for Venture Research at the University of New Hampshire in Durham, N.H., estimates that angel investors put $24.1 billion into companies in 2014.

An academic study of angel investor groups, last done in 2007 through the Angel Capital Education Foundation in Lenexa, Kan., examined 1,137 investment exits. Software was the most popular industry, followed by health care and biotech.

The authors concluded that angel investments brought an average return of 2.6 times investment in an average of 3.5 years. That’s equivalent to a 27% internal rate of return, which was similar to or better than the returns from other private equity investments.

That average, however, probably didn’t describe most investors’ experiences. Of all the exits, 52% returned less than the invested capital. But some investments produced spectacular success. Only 7% of all exits returned 75% of the total returns. Due diligence, industry experience and participation — mentoring, coaching or providing leads — all correlated with better performance.


Some angel investors are more interested in emotional and social returns than in financial success. “A lot of times, clients want to help out people they know,” says Daniel Frankel, founding principal of WealthCollab, a financial planning firm in Bellevue, Wash. “There’s a networking component and a desire to be engaged in the investment process. Sometimes, they want to put their time and expertise into a new project as well.”

If a client’s main desire is to help out a friend or relative, that could work, Frankel says. In that case, however, it’s important to be clear that the transaction is more a discretionary or entertainment purchase than an investment.

“I think people get a little confused when they’re presented with the opportunity by someone they know,” says P. Jeffrey Christakos, lead advisor at Westfield Wealth Management in Westfield, N.J.

If you’re primarily interested in return, he says, “You want some series of expected returns based on historical models. That’s investing. This is gambling.”

Whether clients want emotional or financial returns, it’s vital that they understand angel investing’s risk: It’s easy to lose 100% of capital.

“In the media, we constantly hear huge success stories,” says Christopher Girbes-Pierce, CEO of Enlightened Wealth Management in Santa Monica, Calif. “We don’t hear about the high percentage of failures.”

As many as nine of every 10 new companies never make a penny, Girbes-Pierce says. Even then, not all the survivors pay off early investors. Those that do may pay out in the far distant future, and the investment may never be liquid. An angel investor needs a wealth plan that can withstand the loss of an entire ground-floor investment.

Potential angel investors need to be conscious of how long the odds are, Christakos points out. “The company doesn’t already have funding, or they wouldn’t be giving away part of the company,” he says. “They’re coming to you because they can’t get money anywhere else. If objective people have said no, you probably should say no too.”


Given all this, it can be tempting to strongly discourage clients who want to become angel investors. “You don’t want to do that, ever,” Frankel says. “It suggests to clients that you’re not open-minded or that you don’t feel comfortable in this area. You need to be at least open to discussion. If you say no as a quick response, they may do it anyway or seek out other advisors. It ends up being a lose-lose, because you’re not their advisor on that portion and the client isn’t making the decision in light of the whole portfolio.”

Girbes-Pierce agrees that an advisor does not want to be seen as issuing a veto. “I don’t want to be the guy who kept them from investing in the next Uber,” he says. “I always emphasize that they’re making their own decisions.”

With a savvy planner’s involvement, those decisions can be better ones. Consider whether the client would be the firm’s only outside investor, or the smallest investor in the company. “If they’re raising millions and you’re investing $100,000, you want to see some bigger angel investors or angel networks involved,” Frankel says.

Just as the fledgling company is likely to need a variety of investors, clients need diversified investments — a rule that can apply to angel investors too. Venture capital companies make money in part because they are well diversified, and diversification can help individual investors too. Consider the possibility of putting smaller amounts into multiple companies instead of one bigger amount into a single company. “There are plenty of $5,000 to $15,000 opportunities for angel investors,” Paddock says. “Smaller bites are more realistic and allow more diversification.”

The principals at a potential investment shouldn’t be our only sources of information, but it’s wise to let them explain why they see a business opportunity. “Most of my best ideas I didn’t know were good ideas until someone showed them to me,” Paddock says. “We are completely open to the idea that we know very little compared to the people who are involved with them. Listen to them, let them educate you and then use your judgment. You may know something, but you’re not an expert.”

After that, Paddock says, use your common sense. “Is this product something you would actually use? Does it offer competitive advantages? It needs to not just be good, but to also have a good business model, with cash flow, nice margins and an exit strategy, plus a logistical or other reason that the competition isn’t going to come in and beat them,” he says.

Don’t be afraid to bring in a business evaluation expert for a second opinion.


If individual angel investments aren’t right for a particular client, there are still ways to make early-stage investments. A private equity fund of funds is one possibility, Frankel says, and is often a better diversified, more systematic and professional option.

Other clients might want to follow angel investors with established track records. Angel.co offers something like angel-investing mutual funds, each with a well-known investor at its head. “You pick a horse and back that horse, investing in all the same things that the angel investor is investing in,” Girbes-Pierce says.

If the new firm’s principals are willing, a client might consider lending money at first, with the option of converting the loan into equity at the investor’s discretion. “That can help you get your money back if the business is marginally successful,” Christakos says.

No matter what a client decides, keep expectations low. “I have only heard of one story where a $50,000 investment ended up yielding $1 million,” Frankel says. “That shouldn’t be a driver. Most of the deals don’t make you superwealthy. On average, if you do a number of these deals, returns start to get more diversified and your risk goes down — but your chance of hitting it out of the park is still really small.”

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