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Grand Slams, Strike Outs & What I’ve learned about Angel Investing

Major League Baseball’s playoffs are upon us. As I start to get excited about the prospects for my hometown Cubbies — it got me thinking about a favorite analogy I like to use for investing.

Angel investing and investing in early stage start-ups is all about swinging for grand slams. When you connect on one of these the returns can be big. But you’re going to endure a lot of strike outs. And the reality is you may never hit a big one.

On the other hand, investing in multi-family real estate is like hitting a double every time you’re at the plate. It’s not as flashy as a towering four-run homer, but I found it to be the most reliable way to pile up a lot of runs ($).

My Home Runs & Strike Outs

After I left Google in 2007 I was doing a fair amount of angel investing. I even got lucky on a couple of them [1] — but surely I had my share of strike outs. In fact whenever I made an angel investment, I considered the money to be lost — so in the end any return was a bonus. But after a while it felt like I was just giving my money away and it just didn’t feel right (or the smart thing to do.) There were several reasons why I didn’t feel comfortable with most of my angel investing and why it wasn’t a good fit for me. Was I seeing the best deal flow? (i.e. the best ideas and entrepreneurs). And if so, could I really pick the winners? Could I do this better than the professionals and outcompete them for a place in the best deals? Am I willing to invest enough money in enough companies over several years — accepting that I would not know the outcomes to these bets for many years? The answer to all of these was not convincing enough for me to continue and I eventually stopped angel investing. A few years later I read a post by Tucker Max, which did an excellent job of articulating many of my concerns plus a bunch more. “Why I Stopped Angel Investing (And You Should Too)”. It’s long but definitely worth a read if you are currently making or considering angel investments. Link at the bottom. [2]

Lots of Doubles are the New Grand Slam

Around that same time in 2007, I also started investing in commercial real estate with a firm introduced to me by a friend at Google called OpenPath Investments. I didn’t know anything about real estate (accept my own house buying/selling experiences) but the projected returns and the risk profile both looked a lot more attractive than angel investing. Further, I was getting anxious to see some real results. Now, 10 years later, I’ve in fact seen plenty of returns. Over that time OpenPath, which invests in multi-family real estate with a social impact model, has acquired 26 investment properties and subsequently exited 15 of these. In each case the return to me and other investors has been at least a 2X equity multiple. (My proverbial “double”.) What’s more, the average hold of the investment was has been under 3 years and the average IRR has been over 30%.

At the same time real estate investment enjoys a number of favorable tax advantages, which angel investing does not.

Lastly, another aspect of multifamily real estate that I appreciate is that it can deliver both short-term tangible results (in the form of quarterly distributions) and at the same time it can provide longer-term capital appreciation. So while multifamily real estate can be highly profitable and produce and returns that can be comparable to even successful angel funds, it is not speculation. It’s not “house flipping” or a short path to a quick buck. To the contrary, commercial real estate has by far the best risk-adjusted returns of all the major asset classes including stocks and bonds. [3] And I’m not the only one who has to to realize this opportunity. A fellow investor recently brought to my attention a book by an engineer/entrepreneur turned investor, titled “The Perfect Investment”. While the title makes a bold claim, the author, Paul Moore shares lots of excellent data to support the premise that we are in the early stages of a strong, decades long opportunity for multi-family investors brought on by a historic shift in US housing patterns (away from ownership towards renting). It is definitely worth a read.[4]

In summary, I’ve come to realize that I can get consistent and meaningful market-beating returns without swinging for that elusive grand slam. I’ve also found that I’m a much happier investor with the stability of hitting a double every at bat — with no more strike outs!

Batter Up.

A couple other posts that I think you will like:

“My Next Google: A perspective from employee 75

“What Most Investors Miss”

Note: After years as limited partner/investor with OpenPath Investments, I was so impressed with the results that I became and active partner with the firm. OpenPath investment opportunities are for accredited investors. I am not a CPA or professional financial advisor. All opinions are my own.

[1] You can see a list of start-ups I invested in and their outcomes on my LinkedIn profile https://www.linkedin.com/in/davidscacco/

[2] Link “Why I Stopped Angel Investing (And You Should Too)” - Tucker Max

[3] Source: Thompson Rueters Data Stream; data from 1993–2013

[4] Link “The Perfect Investment: Create Enduring Wealth from the Historic Shift to Multifamily Housing” — Paul Moore

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