Intro To Angel Investing | Lecture #8 | Manage Your Expectations - Taught by Garry Johnson III
Dear Students,
The reality is that when you're investing in early-stage startups or even small businesses, many of your investments are likely to fail. It's more probable that an investment will fail than succeed, depending on the type of business, its stage, financials, and other factors. However, statistics tell us that the majority of startups do fail.
As a business matures and figures out its revenue model and efficiencies, it becomes more stable, and its financial performance becomes more reliable. The management team understands that if they invest a dollar, they can expect a certain return. With younger startups, there is less proof and evidence of success. As an investor, you must understand that failures in your investment portfolio are normal and part of the game.
Watch Me Teach Lecture #8:
The term "shots on goal" refers to the idea that the more investments you make, the more likely it is that you will have a success. Putting all your eggs in one basket is typically a terrible idea as an investor. Instead, you need to ensure that you have a diversified portfolio, given that even with diversification, you will have investments that fail.
Investing in technology startups and companies with high growth potential requires a long-term perspective. You should not invest money today and expect to receive it back in as early as one or two years. When investing in startups, you're playing a decades-long game. Venture capitalists think in terms of decades, and their funds typically operate in that timeframe as well.
When you invest in a technology startup, consider the stage of the company and the team behind it. If the company is in its earliest form, it's like a baby. You can't expect a return on your investment until that company matures, which can take years. Generally, it takes five to ten years for companies to grow into stages where they can potentially create returns for their investors.
There are a few ways for startups to have an exit and provide returns to investors. One popular exit strategy is an IPO, or listing on the stock market. This allows early investors to cash out as their shares are sold on the public market. Another way is through acquisition by a larger company.
An emerging method for receiving returns on your investment is to sell your shares through secondary markets. Platforms like StartEngine have begun building their own secondary markets where you can sell your shares to other investors. This allows you to cash out if you don't want to wait any longer or if you need the capital for other investments or expenses.
Here’s a hypothetical scenario:
Jack, a young professional, had always been interested in investing and supporting small businesses. When he heard about a promising startup in the green technology industry, he felt compelled to invest. He carefully reviewed the company's business plan and financials and decided to take a chance, investing $100 in the early-stage startup. The company, EcoTech, aimed to revolutionize the way people consumed energy by developing affordable, efficient solar panels for residential use.
Over the next five years, EcoTech experienced steady growth, securing additional funding from venture capitalists and government grants. The company expanded its operations, opening new facilities and hiring a skilled workforce to meet the increasing demand for its products. Jack stayed connected with the company by attending annual shareholder meetings and keeping up with the company's progress through quarterly financial reports.
In the fifth year, EcoTech's hard work and persistence finally paid off. Their innovative solar panels had become popular in the residential market, and the company's sales were skyrocketing. As a result, a leading renewable energy corporation recognized the potential of EcoTech's product line and initiated acquisition talks with the startup's management team.
After months of negotiations, EcoTech announced that it would be acquired by the large corporation for a significant sum, resulting in a liquidity event for its investors. This acquisition meant that Jack's initial investment of $100 would generate a considerable return, multiplying his initial stake many times over.
When the acquisition was finalized, Jack received an email from EcoTech, outlining the details of the liquidity event and his options for realizing the return on his investment. As an early investor, he was given the choice to either cash out his shares or convert them into shares of the acquiring corporation.
Remembering the lessons from Chapter 8 about managing expectations as an investor, Jack took a moment to reflect on his investment journey. He understood that not all investments would be as successful as EcoTech, and he was grateful for the opportunity to support a company that shared his values and vision for a greener future. He ultimately decided to cash out a portion of his shares, reinvesting the remaining shares in the acquiring corporation, thereby diversifying his portfolio and preparing for new investment opportunities in the future.