Buying a unicorn: So you want to be an angel investor

We’ve all heard about unicorns. I'm talking about the billion-dollar start-ups that are capturing the hearts and, importantly, the 10-figure checks from investors.

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We’ve all heard about unicorns. And no, I am not talking about the rainbow-loving, single-horned mythical creature at your four-year-old daughter’s birthday party. I am talking about the billion-dollar start-ups that are capturing the hearts and, more importantly, the 10-figure checks from investors. These are the magical, privately held companies such as Uber, WeWork, Airbnb, SpaceX . . . and the list goes on . . . that clear the billion-dollar valuation threshold.1

Imagine, a single one of these companies just mentioned is worth more than 20,000 dental practices put together.2 What if you had the chance to invest in one of these before they had their big exit? Meaning, what if your dollars, your hard-earned money, could be put to work to scale from $0 to billions of dollars in just about a decade? Considering the wealth in the dental industry, a relatively small investment could be monumental for launching one of these magnificent unicorns.

Why dentists should consider being angel investors

Dentists are famously known to be high-net-worth individuals. The average dentist is making three to four times the income of the average US household.3,4 They’re even doing better than many MDs, by comparison.3 While dentists may be known for their nice houses, expensive vacations, and luxury cars, it’s the Silicon Valley venture capitalists and the Wall Street investment bankers who are getting their names in lights for smart investments in these itty-bitty companies that make it big. But the good news is that with the average dentist’s net worth, many can easily be angel investors and get a slice of the action. In fact, dentists are perfectly poised to be the “angels” that so many entrepreneurs dream of encountering.

Take Lyft. The popular ridesharing company graduated earlier this year from a unicorn to a publicly traded company. That’s right—it wasn’t always a $20 billion company. It started off with a measly $300,000 seed round on July 28, 2008.4 More than likely, that original money came from a couple high-net-worth individuals, such as dentists, each putting in $10,000–$50,000 to help springboard one of the largest ridesharing initiatives in history. Not only did Lyft, along with Uber, overtake the taxi industry, they created an entirely new market that eclipsed the original taxi market in terms of potential revenue. What’s more, they took a pretty big bite out of the rental car market and put a hurt on limos in the process. Investment opportunities just like these are available each and every day—you just need to know where to find them.

5 tips to investing in private companies

When it comes to angel investing, where does one begin? Here are five tips to help you go into the process smartly—and with open eyes.

Investing is risky—Remember that whenever you invest in anything, your money is at risk. You should be prepared to lose 100% of the money you invest. The private, pre-IPO companies are even more of a risk. However, if you find the right one, your reward could be unlike anything you ever imagined.

Identifying deal flow—Your cousin may come up to you at the next family reunion and say she’s got the next idea to displace Facebook. While she may be onto something, her company probably has no chance. Identifying good deal flow is critical to angel investing. You must find angel networks or online crowdsourcing funds like WeFunder or SeedInvest to make sure the deals you’re investing in are well vetted.

Understand your risk tolerance—There are deals at all stages. Some are mere concepts hoping to take flight. Others are prototypes or in a private beta that are not producing revenue. Still others are a bit more established and have some real metrics and revenue you can benchmark against. Investing at various stages is totally your call and ultimately depends on your risk tolerance.

Align with a founder—I am a firm believer in the idea that everyone deserves a chance. If this weren’t true, only the rich would get richer and the poor, poorer. That said, if you don’t personally know the founder, I would strongly encourage you to understand his or her background. If the founder has successfully been a part of start-ups, gone through fundraising, done due diligence, or had exits, your risk diminishes greatly. If the founder is fresh out of college, living in mom’s basement, and expecting to rule the world, take caution and get to know the situation before investing. I am not saying do not invest in first-time founders, as everyone deserves a shot. Just take more time to analyze the deal.

Conduct thorough due diligence—Due diligence is the process of studying the claims that a company makes to ensure that they are who they say they are and have the capacity to do what they say they are going to do. If you choose to invest via an angel network or fund through an online platform such as WeFunder, chances are extensive due diligence has been completed already. It’s always prudent to verify the information to make sure you know what you’re getting into.

All in all, if you are a high-net-worth individual or an accredited investor, it makes sense to diversify your portfolio and start exploring alternative methods for investing. There are even tons of great companies in dental raising money right now. Even if you’re just out of school or do not have high volumes of wealth to allocate to private companies, you can still invest as little as a couple hundred dollars in startups due to the JOBS Act.5 It is always wise to consult your personal financial advisor prior to making any investment. Who knows, your money could get you a chunk of the next unicorn. Just think about those bragging rights!  

References

1. The global unicorn club. CB Insights website. https://www.cbinsights.com/research-unicorn-companies.

2. Income and Gross Billings. American Dental Association website. https://www.ada.org/en/science-research/health-policy-institute/dental-statistics/income-billing-and-other-dentistry-statistics.

3. Ehrenfreund M. Why dentists are so darn rich. The Washington Post website. https://www.washingtonpost.com/news/wonk/wp/2015/07/29/why-dentists-are-so-darn-rich/?noredirect=on&utm_term=.3351ac399950. Published July 29, 2015.

4. Wang J. Average median income in America: What salary in the United States puts you in the top 50%, top 10%, and top 1% (updated for 2019). Wallet Hacks website. https://wallethacks.com/average-median-income-in-america/. Updated April 10, 2019.

5. Lyft funding rounds. Crunchbase website. https://www.crunchbase.com/organization/lyft/funding_rounds/funding_rounds_list#section-funding-rounds.

6. Spotlight on Jumpstart Our Business Startups (JOBS) Act. US Securities and Exchange Commission website. https://www.sec.gov/spotlight/jobs-act.shtml. Updated December 9, 2016.

RYAN C. VET is a consultant, author, speaker, and entrepreneur. From launching an international marketing agency at age 14 to many successful ventures since, Vet brings his love for customer experience, practice growth, and marketing to all of his clients, from Fortune 500s to local dental practices. To schedule a consultation or invite him to speak at your next event, email ryan@ryanvet.com or visit dental.ryanvet.com.

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