While we know that investment professionals have expertise and lots of resources, many angel investors may not be aware that there are some advantages to being small and nimble in the investment world.
This isn’t a post to discredit VC fund managers as they have a lot of advantages when it comes to making the right investment decisions. These advantages range from having outsized market information to having a team of analysts doing a lot of diligence to ensure deals are on the “up-and-up”. So it’s no wonder a lot of investors prefer to give their hard-earned cash to money managers to do the heavy lifting. However, for some, especially the new generation of wealth flooding into the market from startup exits and the general wealth transfer, investment is a personal endeavor. Using technology in an information age, young investors are demystifying the often elusive world of finance and profitable investing. However, the narrative still exists that retail investors are at a disadvantage. Here are some reasons angel investors can perform better than funds in the long term.
You can play by your own rules
The thing is, even active managers have to follow strict investment mandates that govern what they’re allowed and not allowed to do. From a regulatory standpoint, mandates make a lot of sense and help keep fund managers disciplined. After all, if investors are handing over their money, they’ll need some kind of assurance that the fund manager is going to follow certain rules while handling it.
Most funds will also have limits on how much cash they can hold at any time. So even if the managers think valuations are headed lower, they might still have to invest most of the fund’s cash right away. This often means the fund could end up with less dry powder to take advantage of better bargains later on. It gets even harder to deal with when funds get fresh injections of money from investors and are expected to put it to work immediately – regardless of the state of the market. The manager of a value fund, for example, might have a problem buying high-flying growth startups after a big market pullback due to liquidity issues. But you, yourself, could have (in theory) been sitting in 30% cash for most of last year, and then invested in a startup in an undervalued position. You could also have bought bitcoin for $16,000 in December – all without the compliance headaches that go with it for fund managers. Long story short: you have way more flexibility than most fund managers, and that can be a huge advantage in volatile markets.
You can take a longer term view with your investments
For career stability, it’s ok for a big money manager to be wrong, so long as everyone else is wrong too. But it’s usually not ok if a professional investor takes a big contrarian bet that doesn’t pay off (quickly). That’s why a lot of the pros tend to follow investment trends, rather than completely ignore them and build their own strategy from scratch. In Andrew Craig’s book How To Own The World, (which I highly recommend you read), he writes about fund manager Tony Dye, better known by some as “Dr. Doom”. Dye was one of the best in the business in the 1990s, but he refused to jump on the dotcom-hype wagon with everyone else. He thought tech stocks were too overvalued, and his fund’s performance fell behind the competition during the final stages of the tech boom. Dye lost his job a month before the dotcom bubble burst – even though his analysis was spot-on. As the manager of your own financial destiny, you only have one person to answer to – yourself. And that means you can invest for the long term, and ignore what everyone else is doing in the short term. I personally still remain in crypto despite the considerable loss of faith in the concept.
Approachability
Angel investors are generally more approachable and easier to find than funds are. This gives you a particular advantage when it comes to finding outliers that are unsuspecting and new. Angel investors are far more positioned to find these outlier companies because they can connect more deeply to entrepreneurs and see their vision before anyone else does, especially funds. Examples are Mike Markulla with Apple or Sean Parker with Facebook, or even Elon Musk with Tesla! Another thing that makes angel investors especially suited to this approachability is their tendency to invest in sectors that they are specialized in or have a passion for -especially the passion bit. Being able to connect with a founder’s passion is a key ingredient for supporting an outlier, and with funds receiving the volume of deal flow they do, it is highly unlikely that they are able to see founders the way angels have the opportunity to. This is why angel investing cannot go out of fashion or be under emphasized. It is a necessary step often needed to validate institutional funding later in a startup’s development. This is why we believe in the work we do at Lagos Angel Network to help connect angels to deals and create better market transparency so that angels can build the portfolios that fit their passions and theses. We believe in the new generation investor and proudly empower them to invest in their futures!
What’s the Opportunity?
Sure, you might not have the investment knowhow or market information of a seasoned fund manager; but you can be a lot more agile, flexible, and contrarian with your investments than most of them. You can also build a portfolio across a much broader range of asset classes – and tailor your exposures to match your own conviction and long-term investment goals.
If you’re a contrarian investor who still prefers to leave it to the professionals, there might be a middle ground. You could opt to invest a portion of your cash in active funds like Ventures Platform, Future Africa and Voltron Capital, while leaving some allocation to invest in deals that you personally believe in and can put the excitement into investing for you – if that’s something you enjoy!
Have a lovely weekend.
Victor Kareem
Executive Director
Lagos Angel Network
