Stories of Technology, Innovation, & Entrepreneurship in the Southeast

“Venture capital is a risky asset class.” “You need to be a multi-millionaire.” “There aren’t enough unicorns to make angel investing worth it.”

If you’ve been in the startup/ investment world for any amount of time, you have probably heard these statements in some form or fashion. There’s a sentiment that angel investing is only for the wealthiest businessmen who have plenty of time (and luck) to wait for their return on investment.

Paul Clark, the Managing Director of VentureSouth, wants to change that perception.

On Wednesday, VentureSouth hosted an interest meeting for angel-curious investors and startup founders to learn more about how angel groups operate. Clark facilitated this by breaking down the top 10 myths of angel investing.

Myth Busting

#1 Angels Are Rare and Unusual

“Anyone can be an angel. Anyone can invest in other people’s companies. If you give your cousin a couple thousand dollars to work on his business – you’re an angel investor,” Clark said.

An angel investor is not the same thing as an accredited investor, though the two terms overlap frequently. Angels invest in early-stage companies. Accredited investing is a legal status defined by the U.S. Securities and Exchange Commission (SEC) based on income, status, and credentialing – sometimes requiring a minimum net worth of $1 million.

“About 16 to 20 million households in the U.S. can be accredited investors,” Clark explained. “It’s my mission to get more folks to want to invest in this asset class.”

#2 You Need to Invest a Lot of Money

Articles about the world’s top angel investors make it seem like angel investing requires cutting $50,000 to $6 million checks for every deal, but Clark said the barrier to entry is actually much, much lower.

For example, with VentureSouth, the minimum investment is $5,000, which is a comparatively low entry point.

“We believe in diversification. Place lots of bets, and they don’t have to be big bets,” Clark shared.

#3 You Can Pick a Winner or Two

Clark revealed some inside baseball among his approximately 400 VentureSouth members: about 40 members (about 10%) are losing money.

“What do almost all of them have in common? They only picked one or two deals. They didn’t diversify enough. Nobody can pick just one winner,” he said.

#4 Building a Portfolio Takes Ages

It can, but it doesn’t have to. Clark said it all depends on the appetite of the investor for the available companies looking for capital at that time. Some new investors are relatively risk-averse and may take longer to build out their portfolio… others dive in headfirst and invest $5,000 in 20 companies in their first year.

#5 Angel Investing is Only for Experts

“Only about a third of angel investors come into VentureSouth with previous startup investing experience,” Clark said. “There are so many people to help show you the ropes.”

#6 You Can’t Make Any Money

Just like investing in the stock market, ROI takes time. Patience is the name of the game, and virtually no companies are going to balloon in value overnight.

“Treat it like an asset class and approach it professionally,” Clark said. “On average, VentureSouth members see a 2x rate of return on their investments.”

#7 It’s Expensive

Just like any other investment, angel investing is about putting money in and letting it sit for 3-7 years before taking it out. However, unlike traditional investing in an index fund or even a single stock, oftentimes angel investors get to provide input on the direction, management, and planning of the startups they’re invested in.

“Many of our VentureSouth members sit on the advisory boards of the companies they’re invested in, which gives them some insight into how things are being managed and how plans are being executed,” Clark said. “It also gives them a place to remind founders to be thinking of their eventual exit strategy.”

#8 Takes Too Long

By the time most founders seek out a pre-seed or seed round, they have likely been in business for 6-18 months. Then, once securing investment, the average runway to a successful exit is about four years.

“If you want to reduce the amount of time until you see an ROI, then seek out companies that have a clear-cut exit strategy with a modest goal and an achievable timeline,” Clark said. “If you go for all the big swings – like lofty IPO dreams – your ROI may take a long time to come to fruition (if at all).”

#9 You Get to Run a Company

This is not the goal, Clark emphasized. Angel investors, he explained, should trust the management teams to execute their plans. Typically, if investors have to step in to lead, it’s not a good sign.

“Instead, we look for opportunities to help by serving on advisory boards, offering contacts, referrals, and wisdom,” Clark said.

#10 There’s Not Enough Unicorns in the Southeast to Make Investing Worth It

“You don’t need unicorns to make money,” Clark said, calling this fact out as the biggest misperception.

Clark explained that if you invest in a company when it has a $2 million valuation, and then the company sells for $20 million four years later, that’s still a great rate of return.

“A lot of money can be made doing it this way,” he said. “And there is more security here than trying to be on the next Facebook.”

If busting any of these myths helped sway you into the thought of angel investing, check out VentureSouth. They have chapters across the Southeast.

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