Investing in what you know

I 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.