Big Troubles, Big Opportunities

Carl Filbrich | May 14, 2009

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The current downturn in some of the world’s largest economies has spooked many investors. They wonder if they should just sit on the sidelines and wait for things to turn around. But a number of visionary angel investors see the current troubles as an exceptional opportunity to take a stake in some exciting startups — companies that could take off like rockets when economic conditions improve.

On the whole, experienced angels are an optimistic bunch. Where others see doom and gloom, they see flickers of light that could turn into bright flames.

This optimism can lead to opportunities. In the current economic climate, venture capital firms are cutting back on their investments and becoming more cautious than usual. They are especially reluctant to get involved in early-stage investments. For angel investors, this is good news. It means that they don’t have to compete with venture capital firms for a stake in the current crop of promising startups.

Angels who have been around for a while learned from their experience in the technology meltdown of 2001-2003. They know that there are always great startups around, no matter what the economy as a whole is doing. And with less venture capital available, there are plenty of good candidates that are not getting funded. This gives angels the luxury of being more selective in their investments. When the economy turns around, many of today’s promising candidates will become tomorrow’s superstars.

In an important sense, this is an excellent time to be an angel investor because the world’s economic troubles have driven down the valuations of startups. The value of a new company is determined by an estimate of its assets, its market, and its income stream. When these numbers go down, the value of the company goes down. This means that angels can buy a bigger stake in a startup for the same amount of money.

When things do turn around, it is highly likely that Asian economies will lead the way. When this happens, angels who have bought sizable stakes in Asian startups at bargain prices may see an impressive return on their investments.

In good times and bad, Venture Hype is a meeting place for people who look beyond today’s ups and downs to the promise of the future — people who know that any day is a good day to make a difference.

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Filed Under: Perspectives

* Please be civilized. Comments that include ad hominem attacks or destructive criticism will be removed.

TheCrimson

When your down there is no other way than up, that's what other angel investors should be thinking. Opportunities arises when a lot of people looks as if there is no hope.

malou

good points. how can you be a winner if you can't embrace opportunities.

Lavric

Yes you are right but bad things can always turn into good things and if you have experience you can always make money easy.

Ricardo

I agree with the points put forth above, and I'd add that if someone's getting close to their retirement age, they would probably want to selectively manage the amount of money they invested in the ventures referred to above, based on their overall portfolio.

I have a few acquaintances who may not have the required comfort level for the necessary risk involved. Plus they may be looking for a return before one may be expected from these more speculative opportunities.

I also think there are people who will always want these investments as part of their financial endeavors.

The Hyper Team @ Venture Hype

Your logic is sound but majority of angel investors are in the 45 to 54 age bracket, according to the most comprehensive angel investing research conducted by Dr. Scott Shane.

You're right about risk tolerance. Angel investing certainly isn't for everyone as it's a high risk, high reward activity.

themermaid

A highly informative post! I like this part of it the most: "Where others see doom and gloom, they see flickers of light that could turn into bright flames." I guess this attitude could do us good in other areas of life too, not just investment. I am really glad that the Asian countries are doing well economically. Being from an Asian country myself, it really warms my heart to know that my country is, at last, on the way to economic well-being.

The Hyper Team @ Venture Hype

Carl articulated it very well.

Ricardo

I think the challenge posed by today's economy is felt at pretty much all levels of investing. I know people who've bailed on their somewhat modest mutual fund accounts, taking the loss from fear of incurring more loss of their nest eggs.

I assume it gets more tense as the amount of your investment and speculation rises.

kotosof

Yes but we must always keep in mind that failure is something that makes us better. Loses may be there but the will to go on is something that is much important and will definitely lead anyone's to success.

The Hyper Team @ Venture Hype

Risks come with the angel package – a company with low level of risk can easily get their hands on bank loans and low interest rates. That's not the case for start-ups, however. Investing and lending to new companies are risky because a high percentage of start-up companies will fail. To recover from failed investments, angel investors often seek out high-return investment opportunities, usually those that could yield a 20x to 30x return on their original investments within seven years.

Machida

Some people don’t just recognize the opportunities that are coming their way. This is what separating the achievers from the losers.

I don’t want to boast but I am glad to say that I am able to find a niche that is not yet saturated during the times my family and I am mourning because of my brother’s demised. I am not happy with my brother dying but I am glad that I am able to recognize the niche that I have been missing the whole time.

The Hyper Team @ Venture Hype

Sorry to hear about your lost, Machida. It does take a certain quality to recognize opportunities as they're often disguised in undesirable circumstances. We're glad that you can look pass the negative situation and focus on the future instead.

sybil

hi machida..that was inspiring ..i mean in the midst of mourning you found a good opportunity .. you are still lucky i guess..

Orrymain

I definitely see the potential in being aggressive in uncertain times such as these, but at the same time, it's a scary thought. However, in business you don't succeed by being scared. If you pay attention, then definitely some great deals can be made.

kotosof

Exactly. That's scary thought. On the way I see it, that's the thought being implied on the minds on the general consensus. If that is so, then those who sees this should seize the opportunity. And yes, you really don't succeed in business by being is scared. Risks are inevitable so might as well you/we move forward, because I don't think everyone else would do so.

The Hyper Team @ Venture Hype

Sounds like both of you are destined to be angels ;-)

kotosof

Making disadvantages your allies. We should really move forward and not backward specially at times like this. I remember my mentor who said tole me to instead of just looking at the risks, we must also study them. I think that's the key to survive with this kind of economy.

The Hyper Team @ Venture Hype

As an investor, you'd want to carry out due diligence, or study the risks, once the term sheet is signed. We'll cover this topic in more detail in future posts.

sybil

I think its good to be optimistic in times like this, or even think of what kind of business should be right in this current situation, I remember watching in History channel About a certain Siberian businessman who live in the US and after the civil war(of Siberia), came back home and put up a computer business and become successful, just imagine what it look likes during those times. The place was just starting to rebuild itself .

The Hyper Team @ Venture Hype

Great story. Thanks for sharing.

cirereyes

I think economic recessions don’t even exist; it’s only in the minds of the majority right now. Risk is always out there and we can’t eliminate them, we can only minimize them. Experienced investors knows well how to survive in bad economic situations, and being proactive would help you surpass all of these challenges to come.

The Hyper Team @ Venture Hype

Nicely put. Seasoned investors love to invest during recessions because company valuations are low. Like you said, risks exist in both good times and bad; we can't eliminate them but we can minimize them, and this is where due diligence comes in.

tongyun

For someone with the right experience, there is no such thing as a bad time to make money. Throughout the history of the world, people have made money regardless of what was happening to the economy. It just takes the right experience and faith in your abilities to sort the wheat from the tares.

The Hyper Team @ Venture Hype

Reminds us of Warren Buffett. Some of his fundamentals work beautifully in angel investing:

1. Be fearful when everyone else is greedy and be greedy when everyone else is fearful.
2. Buy companies for less than you think it is worth.
3. Invest in companies and industries you understand.

andrew25

Big troubles would certainly be turned into great opportunities. I remember the dotcom bubble period where the talented took the task of turning the hardship into a success and which eventually became a big success for many of the companies which were budding at that time. Attitude is the one which determines the success percentage of a corporate.

crimson45

With this big amount of trouble if you are really a skilled angel you can turn this into big opportunities, there are a lot of resources all around us that can be used thinking that these are waste but in turn this will turn into big money.

The Hyper Team @ Venture Hype

True, seasoned angels often look at economic downturn as a great opportunity to shop for startups that are going on sale.

The Hyper Team @ Venture Hype

Yes! A lot of great companies were launched during recession. Early stage investors who funded these businesses all ended up with some nice coins in the pocket. When it comes to investing, it's all about "buy low, sell high."

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