Stay in your circle of competence
Famous investors often talk about the importance of investing in companies whose products you understand. Peter Lynch waxes lyrical on this in his very readable book One Up on Wall Street, and Warren Buffett trots out his 'I only invest in things I understand' humblebrag all the time.
A few years ago I was offered a chance to invest in a new educational company that would provide teacher education online. I've been a teacher most of my life, as well as a teacher trainer and manager of teachers, so I felt this was right up my alley.
I also knew most of the people involved, who were all respected, hard-working, competent, professional teachers.
They sent me a prospectus and everything looked good. The company would pay a dividend, buy back shares, and hopefully be purchased by a larger entity.
A 20% dividend? Being part of an exciting new company doing good work? The possibility of a profitable exit? Sign me up :)
I invested $12,000 in the new company, giving me a 2% ownership stake, and it launched.
Doubts grew slowly. I wasn't impressed with the website. Things seemed to be moving slower than I had anticipated. All the founders and members of the team had day jobs. There seemed to be large technical challenges. Attracting paying customers seemed to be more difficult than anticipated.
The first dividend was missed. Communications from the team slowed down, and then pretty much stopped. Emails went unanswered. About once a year I would send an email asking for an update, which would normally be answered but not always with specifics.
The company pivoted, moving away from mass online instruction to a more bespoke, online seminar model (much less profitable and more time-intensive) that didn't require most of the initial tech investment.
Mentally I wrote off my investment and apologized to my wife, whose money I had also used for my chance of startup glory.
To date I have not received any return on my investment and I doubt I ever will.
Well, I learned that it is not enough to understand the product and know the people involved. You also need a good idea of the market.
The founders, great people though they are, were clearly out of their depth in hindsight. Too many teachers, not enough financial types.
If something sounds too good to be true, it probably is (20% annual dividend... hah!).
Angel investing works by investing in 100 companies and hoping that one or two of them make enough money to make up for the money you lost on the other 98-99. Those odds make investing in one company a losing proposition.
Just to be clear, I don't blame anyone for this (except maybe myself). The founders put in much more money, time, and effort than I did and continue to try to make the company work.
I learned some very valuable lessons about competence and diversification, and the loss, while not small, is not going to hurt us or even inconvenience us. It could have been a lot worse!
How about you? Any investing war stories? Would you have gone for this investment (or a similar one in your field?