Comment by manyhats | Hacker News Reader

Comment by manyhats | Hacker News Reader

I disagree on the choice of benchmarks as they're not really comparable. A more comparable benchmark for angel investments in Internet / SW startups would be a broad-based ETF that covers those. Picking a couple of the larger ones, I looked at the same periods (2012-2019 and 2016-2019) for each of them:

FDN: 4.31x / 1.86x IGV: 4.41x / 2.27x overall mean: 3.2x

Not much different than QQQ's 3.04x, but SPY is not a good benchmark due to big differences in underlying constituents.

I'd want to get a better handle on the timing of investments as well to make the benchmark more comparable - e.g., if 50% of the capital was deployed in 2012 (hypothetically) and 10% in each of the following 5 years then I'd weight my benchmark performance in the same fashion.

Finally, I would want to discount the angel investment portfolio for lack of control and liquidity. Much depends on the specifics of the recent fundraising - is the valuation using the pref figure or is it a reasonable approximation of the valuation of the seed paper (adjusting for structural differences)?

Personally, I'd rather have a well-diversified liquid ETF return of X than a portfolio of illiquid minority stakes that are marked to 1.2X. At 2X, I'd be happy with the restrictions.

Please don't misinterpret this as dumping on the result - IMO I believe this to be an above-average outcome and I congratulate the author on their success. Angel is harder than most if the top-few % of investments are not in a portfolio.

I am also curious how many hours this individual put into the investing. I put about two or three hours a year into my investments in VTSAX and VTIAX -- just rebalancing. I would expect given the nature of angel investing that this person put in a good deal more work.

Let's say the per company deal size is $100k, and the excess risk adjusted returns are 2%. That means the deal would be worth about $2k extra to you, annually. (I'm counting your baseline investing effort as epsilon, so the deal gets no credit for returns matching my mutual funds.) Suppose your daily rate is $2k/day. You'd want to spend no more than a work day on this deal, per year, over the life of the investment.

If the amounts are smaller, or the excess risk adjusted returns are lower, then you'd want to spend less time per deal. This calculus also only applies if you have enough money to roll the dice enough times for the risk to even out. If you only have a million to invest, you'd only be able to do ten deals this size. Perhaps your hourly rate is lower, so you haven't accumulated as much of a warchest. In that kind of situation, you might be willing to work more for the same absolute amount of excess returns, but your risk would also be higher. So your risk-adjusted excess returns might shrink to a negative value.

Of course, you can tweak all the variables as suits you, and also there's the possibility that you are person who just enjoys angel investing, the feeling of importance that comes with hob-nobbing with the who's-who, etc. If that's so, then you could view the work as the price of entry, to the extent that it underperforms ordinary investments.

QQQ is also up 50% in the past 12 months, which skews the benchmark. TQQ is up 120% and if you called the bull run in 2012, TQQ would have you up 46x.

That and anybody with ~$1000 can buy into an ETF. Angel investing not only requires more capital but social connections and the prestige of something like a big Facebook exit. There are some funds and things like Forge Global where you can get access without a nice headshot, but otherwise you have to play golf with the founders and/or other investors.

So the SPY/QQQ benchmark does not realistically model the opportunity cost. It's not like angel investing is another tab in the Vanguard fund list where you can see where $10,000 will take you. Angel investing requires you to adopt a lifestyle.

The Sharpe ratio (https://www.investopedia.com/terms/s/sharperatio.asp) attempts to quantify risk-adjusted returns by accounting for the standard deviation of the portfolio.

So even if an average angel investor produces higher average returns than SPY, they might still have a lower Sharpe ratio, meaning the angel is taking on much more risk for only slightly higher returns.

For most investors it's hard to beat a broad market ETF for risk-adjusted returns.

Also the article doesn't calculate SPY total return.

Dividends-reinvested SPY is very different over long periods of time, I get ~3.46 (versus their 3.01) for the from-2012 calculation, which is a substantial improvement (and over only 8 years!).

Pure financial gains are only one aspect of angel investing though. The status and influence of being an angel investor does have its own value. Although I am not sure how you can capture that.

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