I received a minor in economics in college, but that doesn’t make me an economist. However, I have always enjoyed studying the unpredictability of economies and markets. Watching both for over three decades, I can’t pretend that I have really figured much, if anything out. I’ve been an active angel investor over this same period of time, and I have the scars to prove it. Most of my lessons in investing, and in life for that matter, were learned the hard way - as my father predicted.
When I say the “hard way,” I define this as making poor decisions that either cost me hard earned cash, or what is maybe even more painful, missing out on investing in some great founders and their companies. These were opportunities that I knew in my gut that I should do, but I was too afraid. What’s the saying? Fortune favors the bold. Well, misfortune favored me more times than I care to remember, when I based my investment decisions on fear of the world coming to an end, or at least the current downturn lasting forever.
So, here we find ourselves in another Groundhog Day scene. We all knew it was coming and, if anything, maybe a bit overdue. These crazy, insane times, just like the last one, are full of wild swings in the stock market - especially in tech, which are on a predominantly downward trajectory. Welcome to the real world. Markets don’t go up forever, and they can go down just as fast.
Here is the good news that took me way too long to figure out. With every market correction or downturn, if you can control your emotions, there are tremendous opportunities. You can’t panic and you have to think long term. Angel investing, like most investing, is a game of patience. It’s not roulette. It’s more like a marathon chess match. This is the opposite of “instant gratification” that my 25 year old daughter’s generation so embraces. My mantra?
When we invest for the long term and win, we win big - but it takes time, patience and discipline.
Are we in another 2001-2003 downturn, the infamous “dot com bust”, or the “great recession” of 2008-10, or the 2020 COVID economic massacre, again? I have no idea, but I do know this - if you invested aggressively in those years, you were rewarded big time! If you got scared and panicked, you got crushed and were licking your wounds for years.
Downturns always smell of opportunity, but to seize that opportunity you must take any emotion out of it. This is so much easier said than done. When everyone around us is panicking and selling, we must remain calm - namaste. Remember, some of the most valuable companies on the planet were born during these downturns, when most investors were sitting it out. Oftentimes, me included.
I have no GD idea where the stock market, interest rates, inflation and the macro economy are going from here …but there are a few things that I do know that very much excite me as an angel investor in early stage tech companies:
- We are going from a “seller’s market” to a “buyer’s market” - and I’m not talking about real estate here. Founders have had their time in the sun, and raising money over the last few years has been relatively easy and typically under terms that have been, let’s say, less than investor friendly. As an investor, you have to like the swing of this pendulum!
- Valuations have been “crazy for some time!” - as one of my partners Kevin Adamek likes to say. Too many dollars chasing too few deals. We at Florida Funders are already seeing a big shift here. As long term investors, having the valuation wind at our back is a nice change that we believe will pay off down the road.
- Downturns never last that long. The average bear market is 13 months. A really long one is two, maybe three years. You just need to be in a position to ride it out.
- Downturns impact early stage tech less than almost all other asset classes including stocks, bonds, real estate and commodities.
- At Florida Funders, with the recent raise of our latest Fund 2, we are fortunately sitting on a lot of capital, or as we like to say in the industry - dry powder. We are well positioned to take advantage of investment opportunities. Not all funds/investors are in this position, so there will be less competition for great deals.
- We are only in the first or second inning of the digital/virtual revolution brought on by multiple disruptive technologies. These include: AI/machine learning, AR/VR - Augmented/Virtual Reality/Meta, Web3/Blockchain, IOT - Internet of Things, Autonomous Vehicles, 5G, and Quantum computing, all hitting us at once. These technologies are unstoppable and the best will rise to the top and change the world while also creating unprecedented wealth for founders and investors!
So, I believe it’s a great time to be an angel investor in early stage tech, but we must be patient and prudent about our strategy here. These are my suggestions based on much previously self-inflicted trauma:
- The 5 D’s of Angel Investing still hold true - Due Diligence, Diversity, Deal Flow, Domain Expertise and Discipline are more important than ever
- Taking your time and being selective will pay off. Time is your friend.
- It’s time to negotiate aggressively with founders - let’s face it they don’t have as many options. Could this be the end of SAFE’s?
- It's also a good time to double down on founders who are facing these challenges head on - like Airbnb did when COVID hit. My experience is that adversity brings out either whining and excuses, or grit and determination, in founders. The ones that display the latter present an incredible opportunity for investors.
- We must trust the process and be disciplined and know that we are not going to get it all right - the best part is that we don’t need to.
- One good investment in this space will make up for 5-10 bad ones. I love this about angel investing.
This is our current strategy at Florida Funders. My partners and I have all been around a long time - some might argue, too long. I can tell you this, we are super excited about our space right now and would maintain there is no better time, maybe in the history of investing, to be an early stage tech investor.
We are working closely with our founders to adjust to the new market conditions. Our advice to them is simple. Extend your runway, cut your burn, and push out fund raising as far as possible. The smart ones will do this, and they will come out on the other end of this stronger and better than ever - and their investors will be rewarded for sticking with them.
If you bought Amazon stock in 2001, it was trading at $14 per share. A $14,000 investment in Amazon at that time today would be worth over $1M today. At Florida Funders, our team is out there everyday working their asses off to find the next break-out technology companies. This market cycle is not slowing us down. Au contraire, we have sharpened our arrows and we are full out Amazon hunting.