September 18, 2018
Guest post by Tim Adeney who you can find on twitter at @timadeney
There are two types of investors, or perhaps more precisely two types of investments: ‘will-I-lose-my-money’ investments, and ‘how-much-will-I-make-if-it-succeeds’ investments. Or put differently investments that cap the downside as opposed to investments that uncap the upside.
‘Will-I-lose-my-money’ investing is most investing. You’ve worked hard to make money, you’d like that money to make a little bit more, but you really don’t want to lose money, especially all of it. In this kind of world, you are looking to make ‘normal’ returns (say 7-12% p.a.) and you need almost all (say 9 out of 10) your investments to work. And even when an investment fails you are unlikely to lose all the money you put into it. In other words, the downside is capped.
‘How-much-will-I-make-if-it-succeeds’ investments are different. Here you are looking for ‘abnormal’ returns, where you get back 10, 100 or 1,000 times the money you invested. However, and it’s a big however, you expect almost all your investments to fail. This is why how-much-will-I-make-if-it-succeeds matters: you need at least one investment to return enough money to make up for all the other losses. There is no point in investing in ventures that are likely to fail with the hope of ‘normal’ returns if it succeeds. Rather, the upside needs to be uncapped.
Neither way is morally superior but the way of angel investing is the second way.
For angel investors this means:
i) Only invest if you have the stomach to lose money ii) Only invest if you think the returns are going to be abnormal
For angel investing to become the new normal this type of mental adjustment will need to take place for many investors.
Hi. I'm Nigel Gordon and here are my musings on business, investing, startups and growth. Follow me on Twitter