The Angel Investor in the Startup’s Ecosystem
“Angel investor” is one of the best names in the business literature. Maybe, too good a name, to the extent that startups tend to perceive this category of investors as a solution to all problems, which is not. That is why I’ve tried to place it in two ecosystems. You’ll find out what an angel investor may and, especially, may not be.
The Money Ecosystem
The first ecosystem is time-related and refers to the capitalization cycles of a startup. Briefly, an angel investor turns up, as financer, sometime after the founders, but before the capital that demands a completely quantifiable and repeatable Return on Investment. Using bullet points, the ecosystem looks like this:
- Founders: Naturally, they are the ones who start the business, but from the point of view of the resources invested, the contribution in capital is small and this is compensated by work and ideas.
- Angel Investor: It comes after the founders phase and takes a high degree of risk in exchange for a (minority) part of the business, which will be monetized only in case of success and only after a number of years.
- Venture Capital: As different from the Angel Investor, it is an institutional form of financing, even if it includes taking risks for remote benefits. A Venture Capitalist will bring about financing from third parties, as compared to the Angel Investor, which risks their own money.
- Mergers & Acquisitions/IPO: In the exit phase (Mergers & Acquisitions) and/or during the phase of listing on the stock exchange (IPO – Initial Public Offering), the startup is on the brink of maturity, in the sense of a long term predictable profitability. The more available money, the stricter the financing conditions.
Ecosystem of the Organizations and People
If the money ecosystem is time-related, the organizational one refers rather to a definite moment at the beginning of the evolution of a startup. From this point of view, the Angel Investor lives together with the founder among the following organizations and communities:
- Incubators: (Profit or non-profit) organizations that ensure business trainings and work spaces for startups. Most frequently, they are governmental programs and financing.
- Accelerators: These are similar to incubators, but are mainly focused on the growth process of a startup, than on facilities. In the USA, these are rather private than governmental, the same as in the case of incubators.
- Other types of mentors/consultants: Together with the Angel Investors, founders also work together with other experience holders, such as mentors (pro bono or financed by third party organizations) or consultants (which work for a definite fee).
- Communication/networking facilities: To more or less formal trade shows and clubs, you can add Web 2.0, groups ranging from specialized blogs to LinkedIn and other types of presence on social media.
As for financing, a successful entrepreneur will know to look for the appropriate kind of resources which match the growth moment of the business. As for people and organizations, a successful entrepreneur will be able to keep their eyes on the various opportunities available, irrespective of how much they would focus at a certain time on one of them.
After an extraordinary 2019 for the financial markets, many global companies had set unrealistic profit targets, with growth that would be hard to sustain.
Let’s not forget that, for the first time in history, the US technology sector recorded market capitalization that exceeded 1 trillion dollars. In such conditions of exacerbated optimism, it’s only natural to expect to see spectacular falls on the international stock exchanges this year. The bar was raised too high in 2019.
• Dow Jones 30 – a historical maximum of 28,500 points
• S&P 500 to 3200 points
• NASDAQ 100 to 9750 points
These were the optimistic figures when 2019 ended. Everyone, including most financial analysts, was expecting 2020 full of new records.
Only this time, the targets couldn’t be reached – the economy, like history, has a tendency to repeat itself. The longest bull market in history (from 2008 until a few days ago) has been ravaged by the Coronavirus pandemic and, as many can state, popped the business bubble in which we used to live.
THE HISTORY OF GLOBAL CRISIS
The history of global crises is spectacular but also cyclical, as in the most recent past we have the great oil crisis in the 70s, the infamous Black Friday of the 80s, a second oil crisis in the early 90s, the dot-com bubble of the 2000s and, more recently, the financial-real estate crisis from 2008.
We can see that roughly every 10 years, the capital markets go through a reestablishment process, resetting their values – an event which we’re in the middle of right now.
* Since 1945, American blue-chip companies have experienced at least 25 years at an all-time high, 24 years within 10% of an all-time high, and only 22 years in a declining market (bear market) *
The first signs of weakness started showing up at the end of 2019 – an important factor is one of the stars of the gig economy, WeWork, which was preparing for its primary listing.
In less than a month, from an alleged market capitalization of about $ 47 billion, the company dropped to less than $ 10 billion, canceled listing plans, fired much of the workforce, and even removed its CEO from the company’s management, being rescued from bankruptcy only by one of the banking groups in the shareholding board.
In the case of WeWork, the reason for the fall was the circumspection that investors began to have in the quality and stability of the company. But the WeWork case is not unique.
Phase 1 - FEAR
As in 2008, the capital markets and investors initially reacted emotionally, triggering what is called a sell-off panic. Right now, we have a reaction based on instinct, market expectations being that global stock exchanges will reach a general decrease of up to 20%.
After more than a decade of "pampering", a period when money was extremely cheap, friendly lending and market conditions were all favoring growth, the reality is coming down.
Many businesses will have their skills tested, (just as a heavy sea shapes a sailor’s skills, only a real market, built on healthy fundamentals, will train enduring entrepreneurs).
At the moment, the general feeling is one of uncertainty, nobody knowing what to expect, with postponed investments, and expansion and development plans put back in the drawer - all eyes are focused on the state, central banks, and global vectors.
Phase 2 - THE FUNDAMENTALS
After the first wave of decline, we’ll see the markets adapting to new conditions – this being the turning point that can make the difference in a medium to long timeframe between the economies that are recovering - and will even prosper in the post-Coronavirus era - and those that will slow down the economic recovery.
There are two extremely important evaluations:
- Operational evaluation - production and sales figures will be put together (phones sold by Apple, electric cars produced by Tesla, etc.)
- Financial evaluation - financial reports that measure the returns of market shares, revenues, income, profits
I am afraid that once all the above figures reach the market, a second wave of the crisis will start, the one in which the global stock market decreases will rise by another 25-30%.
Overall, on the 2 stages described above, the world expects impairments of up to 50% (eg. DJIA going below 12,000 points).
Businesses are people-based, and when those people lose their jobs, we will start seeing the real dimensions of the crisis. That's why I always pay attention to the labor market figures (the famous US Jobless Claims report hit a record high last week, with about 3.3 million people going into unemployment in just one week).
Phase 3 - THE RECOVERY
The key movement is for central banks and national authorities to take monetary & fiscal measures, and also strengthen the labor market. Economies that will not adapt their structure to the new global conditions are risking a lot, as the rational sell-off, the one based on structural economic decisions and profitability calculations, has a longer life cycle and a much stronger influence than the one caused by initial panic.
Monetary/fiscal support packages have already been launched by all major economies (in the US alone, the Federal Bank announced a $ 3.3 trillion program to counteract the crisis effects), but it won’t be enough: businesses need to adapt their methods, plan everything out in advance, and invest more to add value to their work.
The global economy will recover, markets will reach historic highs again, and investors will regain their optimism. But before all this happens, a global sync with the new economic conditions is deeply needed.
MY BUSINESS PHILOSOPHY
There are 3 extremely important factors that have ruled my business philosophy so far:
• Longevity - I have to build something that will last through it’s added value
• Liquidity - cash flow is essential; I must maintain a balance between savings and investments
• Legacy – ways of building my business to leave something valuable after me
The same 3 factors mentioned above are the ones that will push some companies to new records and others into bankruptcy.
I am deeply convinced that technology giants like Alphabet, Apple, Amazon, Microsoft, Facebook will recover quickly and hold onto the growing trend because their fundamentals are healthy, they have huge cash reserves and their business plans are built for the long run.
My predictions are that Amazon will be the first company to reach a market capitalization of 2 trillion dollars - the e-Commerce sector is booming right now.
However, others won’t be so lucky.
I am more optimistic than in 2008 because I appreciate that the common individual’s level of financial education has increased, governments and central banks have much quicker reactions and are prepared to make any effort to minimize the effects of the crisis.
WHAT TO DO?
I want to leave you with a few recommendations on what’s to be done during a bear market:
Don’t panic! - crises aren’t pleasant, but they’re natural and temporary. History tells us that global stock exchanges spend more than two-thirds of the time close to historical highs)
Take care of your portfolio and finances! - we are all interested in discounts. What better time to buy, right? A global crisis is for the stock market what sales are for shops!
Be patient! - rethink your portfolio, lower your expenses, increase your savings and assets and wait for your return
Hunt opportunities! - moments of crisis create huge investment opportunities - be on the lookout and choose the ones that fit your profile
Panic is useless; add structure to your thoughts, plan strategically, be aware of the risks and act with caution.
We’re going through a natural phenomenon, don’t lose your cool, make smart investments and you will soon reap the fruits!
It used to be the case that one would have some money, and they would go to an advisor who would then, in turn, research different markets and make a recommendation. That person would charge their client a fee for managing the money and a success fee should the placement of funds generate a profit. While the former would vary from, generally, 0.5% to 2% (with the rule being that you pay less when you place more money), the latter could go to up to 20% of your profits. And while, in the old days, one would pay for the work the advisor does behind the scenes to research and get top-notch information in a market, the alternatives nowadays no longer justify paying such high prices to place one’s money. The advisor is slowly being replaced by a user’s own research, online investment management companies, or even Artificial Intelligence.
The price for investing your money has also gone dramatically down, with the rise of more and more digital companies using advanced software to analyse data and generate attractive portfolios.
Stock market investments are also an attractive alternative. However, without experience in the field or a fee-hungry advisor, this can prove to be a problematic choice. The issue is two-fold: on the one side, picking the stocks to “bet” on can be extremely difficult, as it takes serious market research to identify the potential long-term champions; and then, of course, there is the approach that some companies might skyrocket when they are launching new products or tapping into a new market. However, this comes with significant risk, as overnight success is rare, and massive failures have been generating headlines since before we can remember.
One could think that actively investing one's own money is a bold move, but the old-fashioned “keep your money in the bank” option is now a money-losing option.
It’s been 12 years since the modern financial sector started to show its weaknesses, and 11 since the sequence of events that started with Lehman Brothers collapsing nearly destroyed the world economy. The new reality is one of lack of trust in the banks from the younger generation, and of negative interest rates. Yes, in many countries it actually costs you money to have banks take your placements.
As such, it is no wonder that it actually makes sense to find alternative ways to protect and expand one’s wealth. However, there is one significant risk that one should always consider: while not being tied to big institutions such as banks is what has made these alternatives attractive to younger generations in the first place, the downside to that is that, if anything were to happen to them, they will not have an entity behind them to bail them out, which poses an increased risk to customers. As such, research and caution are highly desirable.
Over the last 2-3 years, the shared economy model, championed by the likes of Uber, has been adopted in more and more industries, including the financial one.
More and more platforms are offering the option for people to create portfolios using small amounts of money, relying on the power of the crowd to create strength when put together.
So, here are a few of the options that are out there, and a bit on how they work:
- FinTech is always an exciting field. Have a look at players such as Robinhood and Sofi.com, which offer lending, mortgages and investment to categories of people who would not always qualify for support from a traditional bank.
- Peer-to-peer lending (P2P) uses marketplaces or platforms to match borrowers (people) lenders (also people) - see Mintos, Grupeer, Peerberry, Lendermarket. Those interested can “buy” a share of a loan on the platforms.
- Startups: new and exciting startups are in the news almost daily. Two of the ones that have piqued my interest are forgeglobal.com, seedrs.com. If you have a more serious amount of money to invest, getting “in on the action” at ground level can be incredibly rewarding, both in terms of supporting an entrepreneur who’s just starting out, as well as potentially getting a significant return for your investment. But, as with everything, make sure you do your due diligence and ample research in the space you are about to invest in.
- If you want to go industry-specific, there are now marketplaces for investments in real estate. Don’t have enough money to buy and flip a piece of real estate? That’s okay. You can pair up with other investors, crowdfund and get involved that way. Crowd Estate, for example, promises 17% annual returns.
Please note that I am an investor in some of the companies I have mentioned in this article. This article is not meant to provide investment advice, it is merely an investor’s perspective on alternative investments available. Capital at risk.