Investing is more an art than a science. Angel investing into startups is no different. If it was so straightforward and conventional, why wouldn’t everyone just study everything finance, investments, startups, etc, get the A+ in all of it and then just become rich? Reading all the books only gives you what conventional wisdom says, based on what happened in the past. Creating complicated WACC and DCF often times are done in confirmation bias, supporting what your initial hypothesis was. So putting in random numbers on a spreadsheet and then concluding that was sophisticated analysis is nothing more than, garbage in, garbage out. And thus it leads to poor results.

But particularly angel investing, is in some ways, fortune telling into the future, and this simply can’t be done by traditional numerical projections. Because using a spreadsheet and fancy formulas trying to calculate minute details such as inventory turnover, current ratio, blah blah blah won’t do it. Having some number now won’t tell you what the company will be doing in ten years time, even if your analysis of that number is correct now. Take Amazon for example, in 1997, back when companies actually went IPO when they were small companies, still allowing a lot of profit to be made in capital gains for investors. They had went IPO, on stock split adjusted basis of $0.075 cents per share. And if you held all the way for more than 2 decades, you would be up thousands of times depending on your cost basis, or hundreds of thousands of percentage points. Would any combination of traditional financial metrics have worked in determining that Amazon would be what it is today? How many of those analytics from the A+ professionals wearing expensive suits and speaking in complicated jargon could have correctly forecasted Amazon two decades later?

Yes there may be different analytics and statistics that matter in startup land. Revenue growth, retention rate, total addressable market, obtainable addressable market, serviceable addressable market, gross margins, new user signups/adoption % growth, these matter. But without, as some may say, a good intuitive read, white magic, a crystal ball on the future, those numbers may be short lived positive.

It would have taken a foresight to predict the future on an art basis, based more on street smarts rather than book smarts. One would have needed to correctly see how people would live their lives in the future years and decades in advance. This would be like the movie I Robot predicting the advance of technology and its integration into everyday living. Taking a birds eye view and looking in that fashion may be more accurate in its prediction. In technology we see the advance from black and white tv to today’s 4k connected smart TVs, large home phones to mobile phones to smart phones, capitalizing on unused capacity with rideshare and home sharing, and the introduction of artificial intelligence that can augment productivity, or in same cases, remove the need for human intervention to produce output entirely.

So a natural inclination would be made towards the more generally accepted areas that will face disruption and innovation, such as artificial intelligence, electric cars and related industries, alternative foods, robotics, biotech, gene sequencing, environmentally friendly solutions that better the environment, no code solutions to code, etc.

But many of the existing ideas in hindsight were not widely regarded as no brainers, and were indeed counterintuitive at the time. Some of the seemingly worst ideas in hindsight turned out to be no brainers. For instance, Uber, the first 22 of 25 potential investors rejected the idea. The taxi industry had been the same for so long that it seemed practically set as an oligopoly forever. And the idea of people getting into stranger’s cars, having that trust backed only by a rating system, seemed unlikely. Not to mention whether or not the supply side would exist with the average person being willing to drive on either a part time or full-time basis. Or take Airbnb. The hotel industry had been entrenched longer than people can live for, and somehow, it’s now become a part-time income or even full-time income for many. People have a difficult time even letting there friends live at their residence, and yet, again with the rating system, allowing total strangers in for the extra money seems to not be given a second thought. So it seems sometimes the observations of regular daily life where one can spot an uncommon observation could be the next game changer that propels humanity forward. So it seems having an uncommon sense is what one would need to be able to identify the signal from the noise. Maybe those eccentric types who saw something the rest of us missed were on to something after all

Disclaimer

This is not Financial Advice. This article is meant only for educational and perhaps entertainment purposes.