While some angels may question whether they can afford to invest in start-ups, others might question whether they can afford not to.
Managing a start-up is not the same as managing wealth. The world and its economies are growing at an incredible rate: in the last year, 120 of the world’s countries have grown at a quicker rate than any other year, with Asia set to dominate world industry, overtaking the US and Europe. Gone are the days when a start-up took upwards of fifty years to achieve global reach, but start-ups depend hugely on angels and other wealthy individuals to make this happen. While some angels may question whether they can afford to invest in start-ups, others might question whether they can afford not to. There is a need for diversification of wealth management and investment in start-ups, if the economies and industries around the world are to achieve the heights they are capable of. Peter Jungen led a discussion on this matter recently at the 2018 World Congress of Angel Investors and was joined by Peter Cowley, a top UK angel investor, Paul Doany, the Chief Officer of Torque Telecoms, and Zsolt Katona, Chief Officer of MFB Invest.
IS THERE A CONNECTION BETWEEN ANGEL INVESTMENT AND ASSET MANAGEMENT?
Angel investment is quite different to asset management. Angel investors are very dedicated to their investments, and also need to be able to recycle the money they invest to put into other projects, so they look for investments that they not only feel could succeed, but feel passionate about nurturing and being a part of. Wealth managers, on the other hand, are charged with handling the assets of another person, and making sure they grow where possible; they are guided by very strict criteria, and are all about protecting those assets. For this reason, they distribute assets across risk categories, in order to minimise losses and maximise success.
It is also important to remember that the two are divided by the source of their money. Wealth managers are often handling ‘old money’, assets that have been passed down through generations and are expected to continue doing so, where angels are often self-made, and therefore feel much closer to the money they are looking to invest.
HOW COULD IT BE MADE EASIER FOR WEALTH MANAGERS TO GET INVOLVED WITH ANGEL INVESTMENT?
Angels may well be in the exit business, but wealth managers are not. As we have discussed, the scale of the arrangement is very different. Wealth managers are taking old money and doing what they can to preserve and grow it for future generations, and so exit strategy is really not a concern for them. However, angels tend to be serial entrepreneurs, who want to make a portfolio of investments, and need to see a decent return out of their investment to ensure that they can go on to do this. In addition to this, as self-made individuals, they have a very finite span of time within which to make their money, and the workload they are willing to take on may well change as their lives progress. The liquidity of an exit strategy is quite specific to angel investment, which is a different ballpark completely from asset management, and for this reason, there continues to be a fairly clear divide between the two. The respective interests of either kind of investor is so different, that the two rarely cross paths.
CHANGE CAN OCCUR WITHIN FAMILY OFFICES AND WEALTH MANAGERS TOO. BEING PASSED FROM ONE GENERATION TO THE NEXT, IS THE PLAN FOR THOSE ASSETS LIKELY TO EVOLVE ALONG WITH THOSE IN CHARGE OF THEM, AND THE WORLD IN WHICH THEY EXIST?
There is a difference between managers and entrepreneurs, and managers tend to experience a fear of missing out which can cause their emotions to interfere with smart decision-making. A wealth manager is unlikely to look for chances to be a part of the next Google, as the huge risk is unnecessary for them. Whereas angel investment is about making things, about creating and innovating, and not about making money. It is always passion first, money second for angels. They have enough to lose to force them into choosing wisely where to invest, where asset managers will minimise the risk by investing small amounts in a large number of projects.
HOW DO ASSET MANAGERS VIEW START-UP FAILURES, AND WILL THEY EVER CONSIDER INVESTING IN SECOND OR THIRD ROUNDS?
To an angel, having a failure under your belt is often preferable, as long as the entrepreneur is open about this failure, has decided what caused it, and has learned from the experience. While it is not very common for asset managers and angels to be interested in the same projects, an asset manager may well be inclined to view start-ups the same way. With considerable lessons already learned, a project is more likely to succeed the second or third time around as it is the first time around, and for this reason, can in some cases be the safer bet.
Want to find out more? You can listen to the full speech here –