You’re Living Inside the Gold Mine

Naval: The returns in angel investing are interesting. There’s this meme that angel investors lose all their money and venture capital is a terrible business. It’s true if you aggregate VC and angel investments across the world. But if you stay focused in technology hubs, it’s largely not true.

A competent angel investor in Silicon Valley who’s plugged into a good network, knows what they’re doing and has a broad portfolio might make somewhere between three to 10 times their money over a decade. That’s quite a return. Keep in mind, though, there’s a high amount of specific knowledge and labor that investors put into each of these investments.

There are tax benefits to angel investing

These gains are considered capital gains, which are usually taxed at lower rates than income. This is partially because it’s a secondary tax on corporate income; it’s already been taxed at the corporate level.

There are also tax breaks for angel investors ranging from the qualified small business stock exemption in the United States to very favorable tax breaks in England and other countries. 

From a tax-advantaged basis, if you’re willing to tolerate high risk and illiquidity, it’s very hard to look at any other asset class where you can make as much of a raw return on your money as a patient, diversified, plugged-in angel investor.

The less efficient the market, the better you will do

One way to think about it is: The less efficient the market and the more wealth the underlying asset is creating, the better off you’re going to do. For example, art doesn’t really create that much wealth; it’s more of a tax haven and speculation instrument. The same with wine: The asset itself does not generate much wealth, but the underlying market is very inefficient; so you can make money more easily.

Gambling actually destroys wealth. So it’s not a great asset class to play in, unless you own the casino, in which case you have an edge over everybody else.

Few people can play at angel investing

Angel investing is odd in that very few people can play in it. Very few people have the know-how, geographic access, capital, risk horizon and patience. But at the same time, the underlying assets are changing the world.

I see a lot of people in Silicon Valley who could be good angel investors —they are in the tech industry and have access to dealflow—but instead spend their time on other things. They spend time thinking about macroeconomics: What if the Fed cuts interest rates? What’s happening in the trade war with China? Or they’re shorting stocks, investing in special economic zones or flipping real estate.

You should be doubling down on tech

I have a friend who’s a great VC and runs a rental business on the side. I scratch my head at that. You’re living inside the gold mine—people are digging up gold next to you. The returns in this industry are higher than anything else. You understand it so well. You have specific knowledge. But you have a contempt for investing more in tech that comes from your own familiarity with the industry.

If you’re in the tech industry, you should be doubling down. I don’t know a better industry or better place on the planet to be investing, for today.