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Stock prices today can drop as quickly as you can say
“Eliot Spitzer.”
This is a serious
concern for almost
everyone. For angels,
however, it is a good
thing. It erodes the
risk gap between public
and private equities.
At the same time, the depressed indices don’t depress the
ability of entrepreneurs
to invent the “Next
Big Thing.” And since
no one is investing in
cocktail napkin business
plans any more (or very
little else, for that
matter), only the
heartier entrepreneurs
are still out there.
This simply means that
there is a lot less
chaff obscuring an angel
investor’s view of the
wheat.
Since the bubble burst, many venture capitalists who
previously invested in
early stage companies
have migrated up the
food chain, starving
companies who inhabit
the bottom rungs. Yet
for early stage
companies that don’t
rely on public issues to
raise capital and who
are rarely foolhardy
enough these days to
even mention IPO as a
primary exit strategy,
the effect of weak
public markets and the
upwards migration of
venture capitalist is to
drive down their
valuations. So the
competition for deals
between angels and VCs
is weaker, the demand
for angel funding is
greater, and the prices
are lower.
All boats rise with the tide. Furthermore no one expects the
stock markets to stay
down or the IPO window
to remain closed
forever. So by the time
today’s early stage
company has matured to
the point where the
opportunity for an exit
strategy has developed,
improved strength in the
public markets could
increase the upside
potential of private
equity investments,
perhaps even beyond
historical rates of
return, either by IPO or
buy-out.
Nor is there any reason to believe that any of the
traditional advantages
of angel investing –
better returns, the
opportunity for personal
involvement, lower
costs, betting on a
company rather than a
fund manager, the
ability to chose when
and how much to invest,
etc. – have been
affected.
The fundamental precept of angel investing is “buy low,
sell high.”
If there ever was
a better opportunity to
act on this tenet, it is
hard to imagine. And if
there was ever a time
for someone who had been
thinking about becoming
an angel to become one,
it is now.
Joel Cardis, Esquire is the lead author of Venture
Capital: The Definitive
Guide for Entrepreneurs,
Investors and
Practitioners, 2001,
John Wiley & Sons,
available online through
www.wiley.com,
www.bn.com
and www.amazon.com.
Cardis works with
emerging growth
companies and can be
reached at jcardisesq@comcast.net.
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