There is a one variable that will boost Angel investing returns 7X. This is according to Fundify partner AJ Watson – and he has some interesting data to back up his claim.
Perhaps you are psychic, or just super lucky, but for most early stage investors you dive in with your eyes wide-open and shoulder a lot of risk. Early stage investing is very risky by definition but the rewards can be compelling if you diversify – and know what you are doing.
Watson took to the pages of Medium to spread the wisdom of quantifiable due-diligence. Digging in and rooting around into a business that you are considering dedicating funds. According to Watson his data shows the hours dedicated to due-diligence is probably the most important factor in generating capital gains:
- Investments made after less than 10 hours of due diligence were 43% more likely to fail than investments made after 10 hours of diligence.
- At the same time, investments made after 10 or more hours of due diligence were 2.3x more likely to achieve returns greater than 5x compared to investments made after less than 10 hours of diligence.
This may seem obvious to experienced Angel investors but the world is changing with more retail investors getting into the game. Title IV of the JOBS Act, Regulation A+, now allows anyone to invest in private offers. No accredited investor verification necessary. Title III of the JOBS Act, retail crowdfunding, remains in limbo, but most industry followers expect final rules, or a Congressional fix, later this year. This means there will be a sizable liberalization of access to investment opportunity. Smaller investors interested in backing early stage companies should heed Watson’s data – or think twice.
Many equity crowdfunding platforms are listing only highly vetted investment opportunities. This is good both for the platform, and the investor, as diligence starts at the platform. Funding portals want to have the reputation of listing the best deals and investors will quickly figure this out. There are also platforms that pair professional investors with retail types. This strategy holds substantial promise and has received some compliments from academia too – perhaps becoming the preferred methodology for democratizing access to private investments. Time will tell.
Watson puts dollars to the data stating that for every $1 dollar invested after less than 5 hours of research expect to receive $0.80 back. Not a very good return. Better to leave your money in an ETF. But that $1 dollar grows to $7.10 after 40 hours of research.
Dedicating substantial time to research a company counts. Cutting corners and skipping the due diligence is a path to losing out.