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Fool's Gold?: The Truth Behind Angel Investing in America
The stereotype of the "angel investor" is a retired wealthy entrepreneur who sees potential, asks tough questions, takes a large stake, and in a few years makes a massive return in an IPO. This outsider fills the gap between the venture capitalist and the professional investor, swooping in with cash and expertise to bring dreams to fruition.
Unfortunately, Shane observes, this figure bears no relationship to reality. In Fool's Gold , he draws on hard data from the Federal Reserve and other sources to paint the first reliable group portrait of the lionized angel investors. Surprisingly, he finds that they are fewer, contribute less, and involve themselves in fewer start-ups than the conventional wisdom suggests. Most angels typically still have their day jobs, make investments of $10,000 or less, and take little or no role in assisting entrepreneurs build their companies. Few of the companies they put money into arrive at IPOs, let alone massive returns. But angels can play a critical role, he writes, if the fantasy is abandoned by all concerned. Drawing on his rich store of data, Shane offers recommendations to entrepreneurs and angels alike for the most productive use of angel investing, and suggests how policymakers can encourage it. Particularly promising are angel groups, which pool knowledge and money for wiser and
more productive investments. In groups, angels can rely on each other's expertise, share the labor of performing due diligence, and generally insure that their money is being placed--and used--wisely. Fostering the formation of such groups may be the single most important thing that government can do to boost angel investing.
Massively researched and briskly written, Fools' Gold offers the first real resource on this misunderstood aspect of our entrepreneurial system.
Unfortunately, Shane observes, this figure bears no relationship to reality. In Fool's Gold , he draws on hard data from the Federal Reserve and other sources to paint the first reliable group portrait of the lionized angel investors. Surprisingly, he finds that they are fewer, contribute less, and involve themselves in fewer start-ups than the conventional wisdom suggests. Most angels typically still have their day jobs, make investments of $10,000 or less, and take little or no role in assisting entrepreneurs build their companies. Few of the companies they put money into arrive at IPOs, let alone massive returns. But angels can play a critical role, he writes, if the fantasy is abandoned by all concerned. Drawing on his rich store of data, Shane offers recommendations to entrepreneurs and angels alike for the most productive use of angel investing, and suggests how policymakers can encourage it. Particularly promising are angel groups, which pool knowledge and money for wiser and
more productive investments. In groups, angels can rely on each other's expertise, share the labor of performing due diligence, and generally insure that their money is being placed--and used--wisely. Fostering the formation of such groups may be the single most important thing that government can do to boost angel investing.
Massively researched and briskly written, Fools' Gold offers the first real resource on this misunderstood aspect of our entrepreneurial system.
- GenresBusiness
288 pages, Hardcover
First published January 1, 2008
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Displaying 1 - 5 of 5 reviews
February 12, 2024
High two. I get the main premise of the book - refuting the myths of angel investing and helping more angels to appear. It's just that it makes for a not-so-good book, I guess. As a person who mainly reads to be informed and entertained, the narration is really too repetitive. "X books say angels are this? Nah look at Y survey" for two thirds of the book. I will say that the angel groups part was a tad interesting but it does read like a survey. A few suspicious moments of comparing numbers across surveys, too.
Really, what should have tipped me off was the first chapter, in which it re-defined what an angel investor is. Whether it is more or less accurate is not the point, it's the next few chapters that then compare accounts of other successful angel investor characteristics, then says "nuh uh that's not what the 'data' (really a survey) shows." And then near the end of the book it turns around and says "oh hey those characteristics I refuted a few chapters back? Haha just kidding they define successful angels."
I get that the countering narrative needs to exist. Just give me that last chapter and I'm good, thanks.
Really, what should have tipped me off was the first chapter, in which it re-defined what an angel investor is. Whether it is more or less accurate is not the point, it's the next few chapters that then compare accounts of other successful angel investor characteristics, then says "nuh uh that's not what the 'data' (really a survey) shows." And then near the end of the book it turns around and says "oh hey those characteristics I refuted a few chapters back? Haha just kidding they define successful angels."
I get that the countering narrative needs to exist. Just give me that last chapter and I'm good, thanks.
November 25, 2013
This book is an academic study of angel investing, not a "How To Be an Angel" or "How To Get Angel Investment" book. Scott Shane sets out to investigate the traditional view of an angel investor as a wealthy former entrepreneur who, having cashed out his millions, invests in high-tech start-ups, providing sage advice and earning extraordinary returns along the way. Shane methodically investigates the available data and whittles away at the angel stereotype, concluding that the average angel is of relatively modest means, invests relatively little, creates little value for the businesses in which she invests, and earns poor (and often negative) returns.
However, as Shane points out in his opening chapter, to do the kind of rigorous statistical analysis that he does you must have a firm definition of "angel investor." He chooses the reasonable definition of an angel investor as "a person who provides capital, in the form of debt or equity, from his own funds to a private business owned and operated by someone else, who is neither a friend nor a family member." I find this to be a reasonable and useful definition for the academic investigate in which Shane is engaged, and also for questions of government policy about possible subsidies to angel investment. However, as someone interested in high-tech angel investing of the Silicon Valley variety, the definition is overly broad. Much of Shane's conclusions is that -- by his definition -- there are lots of angels out there that look nothing like the stereotype. I am more interested in whether good returns are available to people generally similar to the stereotype.
Shane does investigate what classes of angels seem to be more successful than others and concludes, as far as I can tell, that angels that look more like the stereotype are more successful. In particular, "Financially successful angels tend to be accredited investors who have significant experience investing in private companies, have worked in the industries in which they invest, and have experience in industries favorable to angel investing... [F]inancially successful angels tend to invest as part of an angel group composed of people who know how to invest successfully in private companies." He also discovers that successful angels tend to behave more like VCs; these angels do extensive due diligence, structure sophisticated term sheets, and are good at valuation.
Perhaps the most interesting chapter of the book is the discussion of angel groups. The legendary Band of Angels is composed of very sophisticated investors and has earned a stunning 50%+ internal rate of return since inception in 1994, largely because of a small number of IPOs of companies in which the Band has invested. In general, Shane concludes that angels who invest in groups do considerably better, due to superior deal access, greater negotiating power, the ability to combine the insights and relationships of the group as a whole, and the ability to better diversify investments. He does, however, highlight a few weaknesses of angel groups, ranging from "groupthink" when making investment decisions to governance challenges.
Overall, I found this a useful, sobering review of the angel capital market. The key lesson for a would-be angel is that unless you are already extremely sophisticated, angel investing is a risky business. And, for an entrepreneur, the lesson is that the average angel may be more likely to harm you than help you; you might want to look for other sources of capital. There is also sobering information about the number of massively successful start-ups: out of 510,654 start-ups in 1996, only 474 achieved sales of $50M+ six years later, and nearly half had failed.
However, as Shane points out in his opening chapter, to do the kind of rigorous statistical analysis that he does you must have a firm definition of "angel investor." He chooses the reasonable definition of an angel investor as "a person who provides capital, in the form of debt or equity, from his own funds to a private business owned and operated by someone else, who is neither a friend nor a family member." I find this to be a reasonable and useful definition for the academic investigate in which Shane is engaged, and also for questions of government policy about possible subsidies to angel investment. However, as someone interested in high-tech angel investing of the Silicon Valley variety, the definition is overly broad. Much of Shane's conclusions is that -- by his definition -- there are lots of angels out there that look nothing like the stereotype. I am more interested in whether good returns are available to people generally similar to the stereotype.
Shane does investigate what classes of angels seem to be more successful than others and concludes, as far as I can tell, that angels that look more like the stereotype are more successful. In particular, "Financially successful angels tend to be accredited investors who have significant experience investing in private companies, have worked in the industries in which they invest, and have experience in industries favorable to angel investing... [F]inancially successful angels tend to invest as part of an angel group composed of people who know how to invest successfully in private companies." He also discovers that successful angels tend to behave more like VCs; these angels do extensive due diligence, structure sophisticated term sheets, and are good at valuation.
Perhaps the most interesting chapter of the book is the discussion of angel groups. The legendary Band of Angels is composed of very sophisticated investors and has earned a stunning 50%+ internal rate of return since inception in 1994, largely because of a small number of IPOs of companies in which the Band has invested. In general, Shane concludes that angels who invest in groups do considerably better, due to superior deal access, greater negotiating power, the ability to combine the insights and relationships of the group as a whole, and the ability to better diversify investments. He does, however, highlight a few weaknesses of angel groups, ranging from "groupthink" when making investment decisions to governance challenges.
Overall, I found this a useful, sobering review of the angel capital market. The key lesson for a would-be angel is that unless you are already extremely sophisticated, angel investing is a risky business. And, for an entrepreneur, the lesson is that the average angel may be more likely to harm you than help you; you might want to look for other sources of capital. There is also sobering information about the number of massively successful start-ups: out of 510,654 start-ups in 1996, only 474 achieved sales of $50M+ six years later, and nearly half had failed.
February 17, 2013
An interesting and valuable book, but not perfect. The book aims to target multiple audiences: entrepreneurs seeking angel investing, all forms of informal investors (including accredited angel investors), and policy makers. Of course, this means that there's a lot that is likely not particularly useful to a reader who is only one of those things. I skimmed the vast majority of the book because of this and because the book was overly repetitive and long (but this is normal for business books).
Is the book worth reading? Probably. If you're an entrepreneur, I believe it provides the most value because it provides insight into the actual behavior and thinking of angel investors. A *lot* of the book is focused on saying how angel investors act an think. If you're an angel investor it's probably somewhat less useful, unless you foolishly think that angel investing is an easy way to make lots of money. Then, please read every section carefully.
The information that I thought would be most interesting, an analysis of the returns of this asset class, was very limited (in depth, length, and usefulness). This is not really the author's fault, but the description of the book implied to me that this was more the focus of the book. I also question the author's assertion that for many angel investors, VC would be a more lucrative asset class -- I don't think the data support the idea that the median returns in that asset class are quite as rosy as commonly thought either.
With all of that said, you should still probably read this book if you are one of the previously mentioned audiences as it's one of the best analyses of this asset class that currently exists.
Is the book worth reading? Probably. If you're an entrepreneur, I believe it provides the most value because it provides insight into the actual behavior and thinking of angel investors. A *lot* of the book is focused on saying how angel investors act an think. If you're an angel investor it's probably somewhat less useful, unless you foolishly think that angel investing is an easy way to make lots of money. Then, please read every section carefully.
The information that I thought would be most interesting, an analysis of the returns of this asset class, was very limited (in depth, length, and usefulness). This is not really the author's fault, but the description of the book implied to me that this was more the focus of the book. I also question the author's assertion that for many angel investors, VC would be a more lucrative asset class -- I don't think the data support the idea that the median returns in that asset class are quite as rosy as commonly thought either.
With all of that said, you should still probably read this book if you are one of the previously mentioned audiences as it's one of the best analyses of this asset class that currently exists.
July 5, 2012
Scott Shane, yet another of my author heroes.
June 30, 2014
Pros:
- a lot of supporting statistics
- some good observations on who angels really are
Cons:
- too much statistics
- slightly too academic
- probably outdated by crowd funding
- a lot of supporting statistics
- some good observations on who angels really are
Cons:
- too much statistics
- slightly too academic
- probably outdated by crowd funding
Displaying 1 - 5 of 5 reviews