Investment advice on the Internet usually comes in one of two forms. It’s either a blog post parroting generic facts and figures related to investing early for retirement, or it’s a horror story concluding that you should just put your money into a low-interest low risk bearing account and call it a day.
AngelMD team members interact with investors across the country and invariably people ask our thoughts on startup investing. Below are a few reasons why we believe today is the perfect time to start angel investing.
1- A Solid Market
As of the time of this post (Fall 2017), the overall economy in the United States is healthy. There has been talk of a significant crash since the Dow Jones Industrial Average crossed 15,000 points, but that was in 2013 and we’ve seen only minor dips since then. The S&P 500 Index, a key bell-weather for many investors, has held strong. Interest rates and volatility are both at historic lows.
But what does this mean to you, as an investor curious about the potential associated with early-stage private companies? Most people who are looking to dip their toes into alternative investments (including “angel” investments) are doing so as a small portion of their overall portfolio. When there is stability in the balance of your investment portfolio, you may consider trying some new things with a portion of your investible capital.
2 – New Rules
Before the JOBS Act of 2012, early-stage private investing was limited to a very small audience of people referred to as “accredited investors” and an extremely small percentage of the population had ever taken advantage of the opportunity. There is a shift underway with the introduction of the JOBS Act because it both opened the door to a broader base investors but also helped create more visibility to angel investment opportunities.
For those of you curious…here are a few key elements of the JOBS Act: First, Rule 506 of the JOBS Act is split into two parts. Regulation B allowed for companies to sell an unlimited amount of securities to accredited investors, and up to 35 “unaccredited but sophisticated” investors. Regulation C allowed for companies to advertise their funding round, a practice known as general solicitation. For many in the AngelMD network, these changes were paramount because they allowed for a wider group of interested parties to have a shot at investing in early-stage companies.
These so-called crowdfunding regulations often get conflated, since platforms like Kickstarter and IndieGoGo were around long before 2016. But those platforms only allowed a backer to give money in exchange for a product once it was launched, whereas the Title III rules give an investor the opportunity to buy equity in an early-stage company. Bottom line, angel investing is moving from a previously very niche investment category to a legitimate asset class with enormous “Alpha” or upside potential.
3 – Changing Technology
It wasn’t long ago that private investment deals were largely circulated through cocktail parties and the like. These days, with a wealth of new technologies at our disposal, our access to information grows and so do our networks. The impact of being able to instantly call upon a wide and geographically-disparate group of like-minded investors can’t be overstated. As this capability grows, individuals can leverage technology platforms where they can store and share their knowledge.
Today’s investments can be guided by a wealth of information that has been distilled into actionable information. While machine learning isn’t a tool to eliminate your involvement in investment decision-making, it can absolutely help to guide choices. Investment managers may be stuck in the technology of the 90s, but the data that they’re using is being influenced by modern-day advances.
4 – Shaping the Ground Floor
As a VC friend once told me, it’s never too early — or too late — to start investing. Specifically, there has never been a better time to invest in healthcare innovation. Giants such as Apple, Alphabet (the parent company of Google) and Amazon are all betting big on healthcare, further justifying the activity that we’re seeing from private investors in the market.
But it’s not just the giants of technology who are putting their money on the table. Everyone from wealthy individuals to large hospital groups is betting on the future of the industry. For example, Houston Methodist Hospital has earmarked a large percentage of a recent $101 million donation toward an innovation fund, and smaller companies are increasingly seeing funds gathered from high net worth individuals versus traditional VC methods.
With all of this activity, it may seem as if an investor would be jumping on the bandwagon rather than blazing a trail. But it’s worth bearing in mind that healthcare is a $3.2 trillion annual market in the United States alone. That is to say, there is a very big pool of possibilities for savvy investors.
5 – The Power of Exposure
At AngelMD we have a mantra of “invest in what you know.” Knowledge of a market is important to the success of an investment. But there’s a broader meaning to this statement as well.
The math of investing is clear — the larger the pipeline of deals you draw from and the larger the portfolio you put together, the more volatility levels out. In finance, there is a concept that the only free lunch is the one you get from risk mitigation through portfolio diversification. Not only does this lessen the risk from any one deal, it also (and perhaps more importantly) gives you the opportunity to learn more. Whether it’s knowledge of deal flow, a specific corner of the market, or the steps of a deal from start to finish, that experience is incredibly valuable to the success of any investor.
We like to say that we don’t invest in winners, we help to create them. The same holds true for our network of investors. By doing smart deals, leveraging technology, getting involved early, and leaning on the wisdom of the network, we’re able to find, evaluate, and transact with emerging companies that are building the future of healthcare. Join us and benefit from this emerging new asset class.
Find the best in healthcare innovation. Join AngelMD today.
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