I had dinner last night with a good friend who built a highly profitable business and had a significant liquidity event. I built a profitable business and had a liquidity event, so I look at him as a role model in many ways. He was in NYC, for among other reasons, to speak to a handful of potential investments - from companies to funds.
As soon as my business started to generate more than I needed to live, I couldn't help but do some angel/startup investing. It's almost impossible not to, especially if you live in an area with high startup concentration. Add to that Angel List, and you might as well just get ready to write checks. My friend has done some angel investing but not much. He mentioned that many people he knows who have had some liquidity do it, but he came to the conclusion that it was probably not a good idea.
Not good for entrepreneurs to invest in other entrepreneurs?
The answer he says is pretty simple. The optimism that guides and makes many entrepreneurs successful makes it very difficult to properly judge the success of a startup. The optimism means being able to see what you would do if you were running the company - to figure out the various angles, potential pitfalls, market opportunities, etc. There is only one problem? You are not running the company.
To succeed at investing, optimism is not your friend. An ability to question, to think rationally, remove oneself from the decision, that is your friend. You don't have to be cynical, just realistic. You don't have to look for why it can't succeed, but unless you are run the ship, stop looking how it could succeed. Start looking for what could go wrong, and can they figure it out. That is why you often hear that investors back people more than ideas.
It is the person that navigates the ever-changing, often challenging landscape. So, if you really know the person, have proprietary access, in depth sector knowledge, or relationships that will absolutely move the needle, (or enough money that you just don't care), then perhaps it could make sense to allocate some of your money to this asset class. If you don't, while it might feel good, realize it's really an investment in your own ego. From a purely financial perspective, arguably the best thing to do is take whatever money you were going to invest in someone else and invest it in your next business.