What is generally more profitable as a career? : angel investment or venture capital?

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JASON LEMKIN

It depends on how much you can invest, and also, where and when you get access to the best deals.

The biggest advantage to venture capital over traditional angel investing is leverage. If you have, say, a $150m venture fund, and 20% “carry”, then effectively, the profits on $30m of that $150m goes to the partners. If the partners put in 3% of the fund themselves (or $4.5m), then, then are getting almost 7x leverage on their capital contributions to the fun. And in bigger funds, the partners often put in as little as 1%.

This is also why AngelList syndicates can be so disruptive. They can provide similar leverage to lay angel investors.

However, this advantage can break down in practice. First, if you invest well, but the other partners do not pull their weight and make, as a group, bad investments (divergent results are common at most firms), then returns are dragged down vs. what you could do on your own.

This issue is exacerbated because in venture, all the deals together in a fund have to earn 1x your money back before any carry (or profits) are taken. As an angel, you can take profits on investments individually.

The second biggest advantage to venture capital is sheer scale, especially in later rounds. Even if you only make 2x on an investment, if you were able to invest say $80m across three rounds, on an absolute basis, that’s a lot of money, an $80m profit. Investing $50k as an angel in that same company, and make a $50k profit, it may not be material. But that $80m sure is. And so on.

However, the need to deploy lots of capital also limits your investment opportunities. A great, in-demand angel can get into almost any deal in her domain area. But there may be only room for one VC per round. And sometimes, a founder at a hot early-stage company may not even want any VCs at all in a smaller round, say after Demo Days.

And finally, this can all break down for wealthier investors. If you are quite rich, the leverage in the venture model may be less appealing, and the taxes and overhead in being a professional money manager may not be worth the headaches.

The third advantage to venture is you get paid a salary. For years. Often, a very attractive one, that is often essentially guaranteed for 5 or 10 years. Now in some sense, this salary is a loan IF the fund does well, because most venture funds (though not all) have to repay the fees of the fund before they are allowed to take profits.

Net net, a very good angel can make a much higher multiple return than she could as a VC. But assuming her partners are also great investors — she can probably make a lot more absolute money, even at a lower return, taking advantage of the leverage and scale in a venture fund.

For me personally, the multiple on my angel “portfolio” today is about 2x higher than my VC investments. But the absolute value of the VC investments is 10x higher.

For the most part, leverage and scale means folks that deploy capital as a VC, and own an entire round — vs. just put in a little piece as an angel — will make more money.

The world’s best angel investments are really something special, however: “The most profitable [angel investment] for Andy Bechtolsheim was his initial $100,000 investment in Google, which, in March 2010, was worth approximately $1.7 billion”

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Published on May 1, 2016
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