We "Debate" a Top Investor

By Matthew Milner, on Wednesday, May 21, 2014

David Rose is one of the most active angel investors on the planet.

He’s been described by Forbes as “New York’s Archangel.” Crain’s called him “the Father of Angel Investing in New York.”

He also runs an early-stage venture fund, founded the most active angel group in America, and started a funding site used by more than 50,000 angels.

Long story short: when it comes to early-stage investing, this guy knows his stuff.

So when he recently published his “playbook” – a bible of start-up knowledge touting the 25% annual returns of early-stage investors – we were intrigued.

To put that figure in perspective: 25% returns would triple your money in 3 years.

Is this stuff for real?

Let’s take a look.

Making Money and Having Fun

In his book, “Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Start-ups,” David puts on his cheerleading outfit. He pounds the drum for more of us to become early-stage investors.

“Angel investing is a legitimate part of an alternative asset class investment portfolio,” he says.

And with the 25% annual returns he points to, who’s going to disagree with him?

“Well,” we thought, as we contemplated our tendency to disagree with lots of things, “maybe we will.”

So, without further ado, we’re going to give it our best shot.

We’ll do it in a format we call, “He Said, We Said.”

He Said / We Said

He Said: One of David’s underlying premises is that angel investing shouldn’t be limited to the super-wealthy.

We Said: Agree! We should all become early-stage investors, regardless of our wealth. It’s good for America – and done right, it can be good for our wallets.

He Said: You need to build a portfolio of at least 20 early-stage companies.

We Said: Too low! Diversification is critical for this asset class. We’d aim for 50 or 100 investments (over time, of course).

He Said: Invest $25,000 to $50,000 per deal.

We Said: He said what? That’s old school. Unless you’re allocating hundreds of thousands of dollars to early-stage deals, think smaller. Thanks to equity crowdfunding, now you can invest at the $10,000 level, or even the $100 level.

He Said: Save at least half your capital in reserve for each company’s future financing rounds.

We Said: We’ve seen no financial evidence to suggest that you should be participating in “follow-ons.” In fact, we’d advise against them. Sure, the companies you invest in might need more capital, but you don’t need to be the one to give it to them. Follow-on rounds are generally done at higher valuations, and that can eat into your returns (see below regarding valuations).

He Said: Invest where you have specific knowledge about an industry.

We Said: Wherever that’s possible, great. But also consider investing where you don’t have knowledge. Just ensure you do serious research and due diligence.

He Said: Invest no more than 10% of your investable assets into early-stage deals.

We Said: Agree. We’d advise somewhere between 5% and 10% to start.

He Said: Invest at low valuations, preferably under $2 million.

We Said: Agree wholeheartedly. Given that most companies will fail, and that, on average, a “successful” company will be acquired for $30 million to $50 million, your seed-stage valuations need to be in the $1 million to $3 million range. In all likelihood, that’s the only way you’ll realize 25% annualized returns.

The Cheerleaders

So despite our disagreeable nature, it looks like we find ourselves in the same cheerleading outfit as David.

But we’re not the only ones. Here’s what a couple of notable investors had to say about David and his new book:

“This is the most comprehensive and readable guide to angel investing ever written. The chapter on valuation and expectations lays out a clear framework for understanding one of the least well-known pitfalls in the angel world….”

-- HOWARD MORGAN, Founding Partner, First Round Capital (investor in Uber, Mint, Warby Parker, etc.)

“As an angel investor and a long-time fan of David S. Rose, I was delighted to hear he finally captured his wit and wisdom in the pages of a book. David’s witty stories and angel investing principles — as well as his unsurpassed knowledge of his field — are teaching me so much more about investing than I’ve learned over the years doing it!”

—BARBARA CORCORAN, Real Estate Mogul, Shark Tank star, Angel Investor

Give it a read – and let us know what you think.

Happy Reading – and Happy Investing!

Best Regards,
Matthew Milner
Matthew Milner


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Tags: Angel Investing Follow-on Investing Valuation Asset Allocation

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