February 28, 2014
by Malia Spencer
Startups can be risky investments, so for those considering investing in the space there are some critical elements to think about.
What is your risk tolerance? Since the money can be tied up for years, are you comfortable with illiquid investments? And perhaps most importantly, if you can’t afford to lose it all, you probably shouldn’t do it.
Ralph Cole, executive vice president, equity strategy and portfolio management for Ferguson Wellman Capital Management offers some of his insights on how his firm handles questions about this asset class.
How often do clients inquire about this type of investing?
A lot of our clients, if they made their money through their own business, which a lot of our clients did, and if they are involved in the startup community in Portland, they may take the lead themselves. It’s the guy that has never done it, but people know he has money, that comes to us and asks, “What do you think?” It’s not as often as you might think, several times a year at least.
What should people think about if they are exploring this option?
It’s really understanding your motivation for doing it. Are you doing it to help the community here in Oregon or are you doing it to help someone you know or is it just something that interests you. That will make a difference how you view it as an investment.
What kinds of questions should they ask their financial adviser?
Actually, we end up asking the questions and then help them understand the perimeters of the investment. Do you want your exposure to be limited? What slice of the portfolio do you want tied to it and how much more commitment do you have to make if these go south? How involved do you want to be — a lot of angel investment funds want you to be involved.
How much of a portfolio do people look at for this type of investment?
There is no rule of thumb, but it’s what we consider venture capital. The venture slice for us is 2 percent or 3 percent of a portfolio, not much more than that. The more you have the more you can afford to put into it because it is so high risk. It comes down to how much are you willing to lose. This can be the highest returns in the portfolio but it is the most volatile.
With headlines like Facebook’s $19 billion acquisition of WhatsApp and other high profile tech startup stories, is that fueling interest?
This happens at every part of the cycle, you start early out of a recession and people are nervous and wary, but they start to see other investments doing well and start to feel better about the economy and are now willing to look at what else is out there. They see headlines that tech is booming and people want to know how to get in it. But those investments (in high profile deals) were made years ago. The time to think about it is at the bottom (of the cycle).
Angel investing: risks, rewards
52%: Amount of angel investment exits that returned less than the capital invested.
7%: Amount of exits that produced returns 10 times the amount invested.