An investment with a 25% possible return, and glamour to boot

One prominent angel investor makes the case for putting your cash in a portfolio of startups

By Aaron Elstein, Crain's New York

May 12, 2014 @ 11:08 am EST

You may have heard last week that China-based Internet giant Alibaba Group filed to go public. Analysts believe Japan's SoftBank, which led a $20 million venture-capital investment back in 2000, now controls a stake that could be worth about $30 billion.

Astronomical returns like that are out of the reach of most mortals, but the big scores from venture capital don't have to be. That is the thesis propounded by David Rose, a prominent New York VC investor behind such successes as ComiXology, a digital-comics retailer acquired last month by for an undisclosed sum, and, which is now owned by Facebook.

Mr. Rose is urging people with at least $1 million they can afford to lose to consider angel investing, which means funding startups at their very earliest stages. For as little as $25,000 per company, investors can assemble a portfolio of fledgling outfits that Mr. Rose contends could generate annual returns of 25%.

"This is a form of venture-capital investing that's accessible for people who don't have hundreds of millions or billions," explained Mr. Rose, who recently wrote a book about angel investing.

He argues that people who invest in enough startups—and 700,000 are launched every year—eventually will hit the home run that makes up for all the strikeouts. Since hardly anyone can foresee when the homer will come, it makes sense to take a lot of swings. Mr. Rose reckons that investors who assemble a portfolio of 50 startups have about a 50% chance of tripling their money over time.

Sounds enticing, but it also means angel investors have an equally good chance of getting lower returns—or even losing all their money—if they fail to land the big hit.

One of the biggest challenges for any investor is learning to evaluate a business plan, as nearly all of them sound good, and Mr. Rose said novice VCs tend to fall in love with one of the first 10 they come across.

Challenging as the VC game may be, the lure of IPO riches is drawing people back to it in a big way. VC funds raised $8.9 billion last quarter, double the previous year's level and the strongest three-month stretch since late 2007, according to Thomson Reuters and National Venture Capital Association data.

Mr. Rose said a group he launched called New York Angels has 120 members, up from 22 when it first convened a decade ago. Some members have found big successes, such as Pinterest, which is now reportedly worth $3.8 billion. "I passed on it," Mr. Rose acknowledged.

A version of this article appears in the May 12, 2014, print issue of Crain's New York Business as "On the side of the angels".

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