The Gotham Gal and I have been fortunate to accumulate signficant capital over the past fifteen years. And the vast majority of it is invested in startups. We get distributions from a sale of one company and within months that capital (after taxes) is invested in more startups (including non profit startups). This has caused a few liquidity issues over the years. The Gotham Gal is always saying that we’ll set aside a bunch of cash next time and then we go and do the same thing. I guess we can’t help ourselves. Investing in startups is more appealing to us than leaving cash in the bank or putting capital into the bond market or the stock market.
When I think about the history of Silicon Valley and startup ecosystems in general, this is the pattern I see. Entrepreneurs, angel investors, and VCs take the profits from one deal and turn around an invest in more deals. They recycle capital back into the startup economy. If you look at Silicon Valley right now, particularly in the early stage/angel/angel list market, this is what is going on. Early employees of Google, Facebook, and a bunch of other succcessful tech companies have taken a considerable part of their paydays and become angels. And it makes sense. They work in the startup economy. They understand the technology, the market, and the gestalt of startup life. They are allocating capital to the startup ecosystem.
I bumped into a friend last week who sold his company a few years ago. He spent the required time with the buyer and then left. He’s been spending his time since starting a family with his wife and investing in startups. He told me he’s not sure he’ll make a lot of money angel investing, but he’s hoping to at least breakeven. So he’s not doing it soley for the returns. He’s doing it to stay connected to startups and support other entrepreneurs. I am certain he’s not alone in his approach to angel investing.
I’ve been told that the US venture capital and startup system is the envy of the world. If so, then I think the rest of the world should pay as much attention to the way entrepreneurs recycle their capital as anything else. Yes, the institutional venture capital system is a big part of the success of our tech startup economy. But it starts with entrepreneurs and angels. Most VCs don’t supply capital in the first year or so of a company’s life. So startups need to get their initial capital elsewhere and that early money is where the real special sauce is. Think about Andy Bechtolsheim’s $100k check to Google or Peter Theil, Mark Pincus, Reid Hoffman, and Sean Parker’s early angel investment in Facebook. These entrepreneurs were recycling their capital back into the startup economy. Yes, those investments have paid off bigtime. But they also supplied capital when the company needed it the most.
The Gotham Gal and I allocate most of our capital to startups for many reasons. We do think we are going to generate good returns over the long run doing this. We have generated almost all of our capital over the years by investing in startups. But we also do it for the psychic benefits of investing in startups. When you back an entrepreneur early on, it is like making a large gift to a good cause. It feels really good. And when that entrepreneur uses your early support to create something important and valuable, it feels even better. You can’t get that kind of feeling earning interest from a bank or trading stocks and bonds. And that’s a good thing. Because capital formation for entrepreneurs and startups is the key to a healthy economy. And for all the problems we face in our country, we have a startup financing culture that is the envy of the world. And I’m really happy and fortunate to be part of it.