Investing in what you know

ImagesI have been starting to hear from many women who are really beginning to think about investing in start-ups, particularly women entrepreneurs.  More and more women have created capital that allows them to think about taking a portion of their wealth and putting it to use as an angel investor. 

I had heard from many women who have said they aren't sure about being an angel investor because they don't know anything about it.  Once we begin to speak about a particular business that they are familiar with it is apparent to them they actually know a lot.  They might not know the particulars about a legal document and the difference between preferred and common stock but that can be learned.  What can't be learned is the years of experience they have had about a parrticular vertical where they have been involved with things that work and things that don't.  That is valuable knowledge to pass on. 

I had lunch this week with two of my favorite people.  One of them is someone I admire and truly look up to.  She told us a story that has really stuck with me.  About 20 years ago she had inherited some money when her mother died.  She wanted to take that money and invest it properly.  She went and spoke to a variety of men that she knew and asked them how she should invest the cash.  Each of them said basically the same thing.  Don't worry about it, I can put it in a fund for you or I can diversify it into a few things but that is not what she wanted.  She really wanted to invest her money in something that she could understand and watch grow.  She wanted to be involved. 

One day she walked into a bank in her neighborhood and sat down with a young man who gave her the best advice.  I knew exactly what the advice was before she said it.  He asked her what does she know best.  What she knows is art.  She was an incredibly successful art dealer and has an eye for talent.  His advice was invest in what you know.  So she did.  She took 75% of the cash and put it into art.  She took the other 25% and put it into something safe like bonds. 

Fast forward 20 years, she invested heavily in one particular artist that she believed in.  She now has the worlds most important collection of this artists work and it is worth a small fortune.  The return she could make on that art if she chose to sell it today is more significant than anything she could have done with her cash.  What is more important it she enjoyed the process and was part of it.  I am pretty sure she would not have had the same determination and joy putting her money into the stock market. 

So my advice to people who are thinking of taking a piece of their capital and putting it to work in start-ups, put that money to work in start-ups that you understand.  Your knowledge is valuable and you will absolutely enjoy the process.  It is mentoring at a completely different level.  It is rewarding for both sides of the table, you and the entrepreneur. 

Comments (Archived):

  1. kirklove

    Great advice. Similar advice I always liked: Invest in things you love to use (products, services, companies).

  2. Wendy Read

    Great piece once again!

  3. falicon

    Great advice…my wife and I have been talking about doing some angel investing ourselves lately.We haven’t officially made the leap yet, but we do feel like my tech. knowledge/background could give us a great advantage (compared to our complete lack of knowledge in general stocks and funds)…and though we prob. wouldn’t put a huge amount into any one deal (especially to start), my ability to do some hands on dev. and tech. help would *hopefully* add a lot of value to any of the companies that we did back.The only real thing holding us back is that I’m also in the process of getting my own startup/company off the ground (and looking for seed funding myself)…and as much as I want to put some of money to work, spread out our startup risk a bit, and help out as many other early-stage companies as I can…I also don’t have the bandwidth for the distraction right now (at least not to add the level of value/help I would feel good about)…but it’s def. floating around in our heads for the long term…

    1. PhilipSugar

      If you like operating (said you were hands on) I think the best is to invest in yourself. Who do you know better? I’m not an angel investor by definition because I always end up taking a role in my investments even if its a small one like my Nurse Practioner’s wife’s practice for Veterans and Servicepeople.I think the advice is spot on. Take 25% of your money and don’t lose it. The rest: invest in what you know, because that’s just another way of saying invest in what you like, because you don’t get to know stuff you don’t like.

      1. falicon

        Good advice thanks!

  4. Karenjacksol

    Entirely agree with the idea but would advise anyone to diversify investments. 75% with one artist is a big bet.

    1. Gotham Gal

      agree. she did not put it all on one artist but was able to follow-on consistently with one artist vs many.

    2. falicon

      I agree, but I don’t think all 75% went into one artist, but rather art as a whole (perhaps a large % did go into one specific artist, but it’s also over a long span of time so it may not have been as risky as it sounds).

      1. Gotham Gal

        exactly. it was years of collecting.

  5. JLM

    .Peter Lynch of Fidelity Magellan Fund fame said the exact same thing years ago. Great wisdom on both of you. Your advice is more earthy.Well played..

  6. takingpitches

    Your post reminds me of something that I heard Warren Buffett say on Marketplace a couple of days ago:”I don’t get carried away with trends or get envious of how people are making money in something that I don’t understand. I sort of stick with what I understand.”

    1. Adrian Meli

      That’s a great quote and couldn’t agree more with it. As he says, “stay within your circle of competence.”

  7. JimHirshfield

    I like this, thanks. My problem is I love start-ups and know them well having started in start-ups in 1995. So, lots of start-ups look good to me…more than would be wise as an investment thesis. 😉

    1. Gotham Gal

      the first year everything looks fantastic. then you start to become a little more discerning.

  8. Lukas Hartwich

    Sound advice!

  9. Giacomo Balli

    Very True.However, you should always be cautious. 1) you will never know everything about “something”2) there is always someone who knows more than you on you field of expertise.Be careful when investing 75% of you money on one thing.

  10. rebeccastees

    I love the idea of you doing a skillshare class on angel investing in women’s businesses.

  11. Wavelengths

    I’m so deeply pleased when I hear about people who have acquired money that they can afford to risk who choose to invest in others.At the very best, everyone wins with this.I agree with you — especially for individuals who are stepping into this arena — stick with something you really know.Unscrupulous sharks will try to take money from those who really don’t understand what they are investing in.If you know the product, the market, and the general environment, you are much less likely to be “taken” and far more likely to be a happy investor sharing in the success of your entrepreneur.

  12. TanyaMonteiro

    this is such a fantastic way to guide my mind in thought, thank you so much, a pertinent time for this advise in my life. thank you

  13. Iggy Fanlo

    Beautifully and simply said…

  14. Lally

    Thanks for the post, Joanne. It’s so simple.. but I can see lots of people making the mistake of thinking they know something but really don’t. I also think that part of investing in something you know is also investing in something you stand for. That’s what true angels are made of!

  15. Realty Mogul

    The simplicity of this advice is wonderful. We had a similar experience – liquidated the equity portfolios and started investing in real estate. That’s what we know!