Here's the Secret to Angel Investing

By Jeff Brown

Tuesday, January 12, 2021

Editor’s note: As we mentioned yesterday, Empire Financial Daily editor Berna Barshay is currently attending the annual ICR Conference. So, for the next two days, we’re sharing guest essays from our friend and Brownstone Research founder Jeff Brown, who is super-bullish on an emerging asset class…

So you want to be an angel investor…

I (Jeff Brown) don’t blame you. Investing in private companies – before they reach the public markets – is one of the most lucrative investment strategies in the world.

I say this from personal experience. I’m an active angel investor myself. I’ve invested in dozens of deals over the years with incredible success.

I’ve invested in four “unicorns” (a private company valued at $1 billion). And I’ve also invested in two “decacorns” (a private company valued at $10 billion.)

By my own estimations, I’m sitting on returns of 936%, 14,000%, and even 25,000%.

And then there are famous examples of private investors and venture capital (“VC”) firms making a fortune with early stage companies.

Private investors in Uber (UBER), for instance, turned $30,000 into $149 million… $50,000 into $248 million… or even $510,000 into $2.5 billion.

Yes, investing in private deals can be very lucrative, but it’s a dark art…

It involves high-risk decisions every time I make an investment. And angel investors are always dealing with imperfect and incomplete information.

There are no U.S. Securities and Exchange Commission (“SEC”) filings. Oftentimes, the product doesn’t even exist yet. And sometimes I don’t even have proof that the market exists for the product or service.

Not only can I not be risk-averse, but I actually have to be risk-prone… And not everyone is comfortable with this kind of investing. In fact, very few are.

But I’ve learned a few things during my many years as an angel investor. So if you’re interested, I can offer a few tips…

Rule one is to understand the fundamentals…

The first rule seems obvious. But you would be surprised how many angels get stuck right away because they can’t assess the value of the technology or the market opportunity.

Does the technology make sense? Is there a clear vertical (i.e., a narrow market where the tech can flourish) for this tech to be deployed in? Is the company doing something entirely new and unique? Or is it just moderately better than what exists in the market today?

For instance, I’m a private investor in Ripple Labs, a blockchain-based payment services company. Without getting into the specifics, this company has radically transformed how cross-border transactions are made by central banks, private banks, and multinational corporations. It’s a brand-new technology, not a small upgrade on an existing system.

Understanding the core technology and the market opportunity is essential before making any investment as an angel investor. Investors who can’t answer these questions correctly end up making bad investment decisions over and over. They lose money. They are gambling rather than making informed investment decisions.

Rule two is to practice patience…

Investing in private companies is very different than investing in public markets. Investors can purchase shares in public companies one day and then turn around and sell immediately if they want.

With private investments, that’s not an option… Private investments, for the most part, are completely illiquid.

Private investors must wait for what’s known as an “exit” to take money off the table. Typically, an exit means the private company is either acquired or goes public, allowing private investors to sell shares to the public markets.

An angel investor might be sitting on gains as high as 250,000%. But if the company never exits, guess what? All those gains are just on paper.

If you want to be an angel investor, you’re going to have to be patient for these exits. Very patient.

Your first major exit will likely happen within seven to eight years. But private investors may sit on a deal for 10, 15, or even 20 years waiting for an exit.

The longest period that I had to wait for an exit was 15 years. The company finally went public. I made a profit on the investment, but it wasn’t large enough to justify the 15-year wait. Some early stage investments are like that.

Do you have the emotional fortitude to wait that long for a return? If you want to be an angel investor, you’ll have to cultivate patience and be completely comfortable with the chance that you’ll lose all your money.

The third and final rule is to let the numbers work for you…

Rule three is something I encourage for all investors, even when investing in public companies. You need to build a basket of early stage companies that all have great investment return potential. In other words, you need to let the numbers work for you.

It may surprise you to know that as many as 75% of VC-backed companies never return money to early investors. What that implies is that most investments made by venture capitalists actually fail.

An important rule to being successful as a private investor is to cultivate a large basket of private deals and let the statistics work for you.

Many of the investments will fail completely. Some might return your money with a modest profit. And a small percentage can go on to deliver life-changing returns. It’s these “jackpot” investments that make up for all your losses and then some.

That’s why the basket is so important. While I may have opinions about which companies are going to deliver extraordinary returns, there is really no way to tell which ones will.

As I said, I estimate I’m sitting on a return as high as 250 times. When this company has an exit, my return will more than make up for the small number of losses I’ve had in the past.

As a starting point, a portfolio should have a minimum of 30 companies. A more robust portfolio would aim to have 100. The more quality private investments you make, the better your chances.

And investing over an extended period will always work to an investor’s advantage. For example, it is not prudent to make all your early stage investments in just one year and then wait for them to mature over the five to 10 years that follow.

Technology is advancing so quickly, it is important to get exposure to new companies that are working with the most advanced technology every year.

We can think of our investments in “cohorts” made each year over a span of years.

Now, here’s the bad news…

Unless you are well-connected and have a very large amount of capital to deploy, breaking into the private investing space is difficult… perhaps impossible for some.

This has been one of the most unfair dynamics in the investment world over the past decade.

Bleeding-edge technology companies with the potential to be “the next Amazon” have been mostly locked away from everyday investors. They are intentionally being kept private for extended periods of time.

This allows well-connected venture capitalists and private equity firms to capture the majority of the upside for themselves. Once the company finally goes public, there is very little upside left for everyone else.

That’s not fair.

So I decided to do something about it.

For the past five years, I’ve been quietly investigating how I can deliver VC-like returns to everyday investors…

And now I’ve finally come up with a way for regular investors to get in on “pre-IPO” shares.

It’s something totally new to most of my readers. In fact, I’d bet 99% of investors have likely never heard of this before. And even better, you don’t need to be an accredited investor to take part.

Not only that, but all these investments can happen with just a few clicks on your brokerage account.

If that all sounds too good to be true, then I encourage you to tune in on Wednesday, January 13, at 8 p.m. Eastern time for my Pre-IPO Code Event. I’ll be hosting this special presentation to give you all the details on these investments. It’s something I don’t want anyone to miss out on. I hope to see you Wednesday evening. Click here to reserve your spot.

In today’s mailbag, readers share their experiences and thoughts about traveling during the pandemic…

If you’ve invested in private companies, we’d love to hear from you. Send your experiences to [email protected].

“I have been an Alliance Member for three years and love Stansberry Research. I attended the Canyon Ranch week in Tucson last February and it has changed my life for the better. I will turn 65 in September and retired 5-1/2 years ago. I sold my business in Houston, TX and had a 5-year NCA [non-compete agreement].

“We joined Wheels Up this November and plan to fly private for the next two years. Wheels Up has an affinity (partner) relationship with Delta Airlines (DAL) that qualified me as Diamond Medallion (I was a Gold Medallion prior).

“I live in NW Florida 7 months of the year and Northern Wisconsin 5 months (during the summer). We recently chartered a private flight through St. Joe (Western Aircraft), to fly down to Marathon, FL (Jet Center), for a trip to Little Palm Island Resort (in the Florida Keys).

“I will not fly commercial until enough people have been vaccinated, to eliminate or at least minimize transmission, or the Airlines institute a vaccine passport (App) system for travel. Trust this is helpful info.” – Jeff H.

“Hi Berna, I love the stuff that Empire Financial suggests when it comes to stock picks, however, in my humble opinion, I think those with means who are traveling for pleasure right now lack something one cannot put a price tag on. This pandemic doesn’t end simply because people are impatient or eager to see loved ones. I think we owe it to those who have died – not to mention those who are still dying – to stay home if we can afford to. I’ll travel again when it’s both safe and respectful to do so. Thanks for letting me vent ;)” – Steve S.

Berna comment: Thank you for sharing your perspective, Steve… I wrote about the airlines and capacity utilization because it’s an important concept for investors to understand.

I actually haven’t flown anywhere since February 2020 because it doesn’t feel right to me to fly right now unless it’s absolutely necessary… but I respect that everyone has a very personal definition of what is necessary for them.

“I flew to Michigan in September, Las Vegas in October, and Arizona in November. I was scheduled to go back to Las Vegas in December but cancelled due to injury (the COVID surge didn’t make me eager to fly near Christmas either). I’m currently scheduled to go to Atlanta in January and back to Arizona to visit family in March. A trip in February is likely, but I’ve not selected a destination.

“I’m nervous about catching COVID from others but I’m also worried about catching a cold (not COVID) and being unable to fly home from my destination. I’ve been very careful on the road, which takes some of the fun out of it, so I don’t catch a cold. As time has passed, there have been more reminders about the need to wear masks on the flight. It could be getting to the point of the airlines needing to stop food (first class) and beverage service because people are using it as a loophole to avoid wearing a mask.” – KHL

“I like Delta. They may not be the biggest, but they are one of the best managed if not the best. Just my opinion. And I have done some research.” – Greg P.

Berna comment: I think between Greg’s recommendation and Jeff’s implied endorsement above of Delta during pre-COVID times, we’re tied at two votes each for Delta and Southwest Airlines (LUV)… and zero for all the other carriers.


Jeff Brown
January 12, 2021

Whitney Tilson
Get Whitney Tilson’s Daily delivered straight to your inbox.

About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to nearly $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

Click here for the full bio.