Adventures in Alternative Investing - Lessons So Far

In the past 18 months, my wife and I have made 10 investments in alternative assets on top of a couple additional a few years before. Alternative assets are a diverse bucket but for us it's been start-up companies and some commercial real estate and apartments. What did I learn and wish maybe that I would have known?

By the way, this isn't investment advice. These are my personal lessons learned.

 For angel investing in startups. I've learned the following:

• Glad we joined an angel investing group as a starting point - good education opportunities, mentors, wisdom of crowds in investments, access to deals - well worth the fee. More below.
• There are lots of parameters to consider in deciding your investing 'thesis'
• A startup index fund may be a good idea, and this could be done on an individual basis without paying profit and fees to fund manager
• Smart entrepreneurs are working multiple investors at once and you may get shutout if moving slow.
• Risk varies widely even in the risky start-up space - from pre-discovery life science to profitable businesses seeking growth capital

 For real estate investing, I've learned the following:

• If you can get connected with an experienced developer, you may be able to tag along with the developer with minimal fees and keep your full share of potential profit
• There are endless number of real estate deals available - just check www.crowdstreet.com as an example.
• For smaller deal sponsors, their success in their hometown does not easily translate to success in other locations
• There's a very knowledgeable and active investor group at www.506investorgroup.com.
• Diversify: we should have spread investments over more entities earlier - now need to catch up with that.

 Why even go down this road? There's some data that show that these kinds of investments can garner a better return than traditional stocks. Of course you never know. They can also be more volatile and have a higher chance of losing all your money which is why most say don't put more than 20% of your investments in these. Still, it's essential to diversify across at least 10-15 or even more projects - particularly in start-up companies - so it's best to make a plan of how much you can allocate in total. The other issue is that these tie up your money for a long time - often 5 years or more. On the start-up side, count me in the crowd who gets energized around entrepreneurs and ambitious ideas.

 For early stage investing, one thing done right was joining angel investing group when we were in Austin. These groups vary but they all offer a few common benefits: wisdom of the crowd for evaluating investments and due diligence, enhanced negotiating power due to the funds of many investors, in-person mentoring and networking, and deal flow since entrepreneurs know they might raise from 10 or 20 investors in the process.

 One investment approach I originally pursued was building an angel investing index fund of all the businesses that were vetted and "approved" by the angel group. I estimated that this was the top 5% of all the companies that presented themselves - the top of the pyramid (This recalls the story when Vanguard started the S&P 500 index fund a few decades ago, the response was "You're buying the dogs too?")

 Pretty quickly we modified the approach. Why? I hadn't defined parameters such as whether it applied to only newly vetted companies or also follow-on rounds. The angel group changed its vetting process so quality might hit a rough patch. Then I started to see more history from the group on characteristics of the successful investment. I decided to incorporate that even though the future is unknown. The result is an approach that focuses on prior founders in B2B and life sciences, and lower valuations.

 In real estate, the best deal is getting connected with an experienced developer. There may be a development fee or an asset management fee for the work to build or manage the property but you might get to keep all the (potential!) profits associated with your share. In these deals, like all, you'll be a limited partner which means you can lose all your investment. If you're ever involved in leasing new office space as part of your job, you might ask the developer about this.

 We also invested in a couple of apartments (multi-family) with sponsors introduced by a trusted friend in Austin. These investments are sideways but not fully in the ditch. So far the lesson here is wishing I had done more research on the range of these investments that are available. Endless opportunities of varying risk span the internet. So far www.crowdstreet.com, appear to be a market leaders - with a vetting process to help ensure poor performing or unrealistic sponsors and deals don't get on their site.

 If you want to explore real estate investing - or have already started, consider asking to join www.506investorgroup.com. For a small donation, experienced investors exchange information on sponsor experience, communication, and performance. The cost of most of these deals are sponsors taking an average of 20% of any of the profits made with your investment- in addition to potential acquisition and asset management fees.

 So, what's happened so far to our investments? Not a great deal actually since most are <18 months old.

• No investments gone to $0 yet - though one is headed that way likely this month :(
• A couple have raised money at higher valuations

 Where's the next area to explore? Crowdfunding sites for early stage companies, and more learning on real estate deals. We need to continue to diversify the portfolio too. If you are new to these alternatives assets or want to exchange lessons or ideas, I'm game to talk. Good luck!