Hello, {{hc_sub_firstname | friend}}! Param here.

Most High Net Worth (HNW) investors I talk to have some venture exposure. A friend's startup, an AngelList investment, maybe a fund position. It's exciting, high-status and the headline numbers are genuinely attractive.

But the actual experience – for most investors, most of the time – looks nothing like the headlines. The reality is that most angel investors often only make 1.2x their initial investment, alongside having to deal with the inherent risks of angel investing – concentration, illiquidity, and the decade-long wait to realize returns. 

And that’s fine if you understand the tradeoffs.

What's not fine is treating angel investing as your entire alternative asset strategy. There's a complementary asset class most HNW professionals have never seriously considered. Not instead of venture, but alongside it.

At Lynnfield, we acquire cash-flowing businesses in the $500K-$5M EBITDA range and offer co-investment opportunities to qualified investors. Join our investor list to receive deal flow as we evaluate new acquisitions.

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The aggregate data on angel investing looks attractive: 22-27% IRR (Internal Rate of Return) across diversified portfolios, per Wiltbank/Boeker studies and ACA data. But those numbers come with enormous caveats that often get buried.

The returns follow a power law. The top 10% of investments generate 85-90% of portfolio returns. Tech Coast Angels saw just 8 companies out of 247 investments drive 77% of total dollar returns. If you don't invest in those outliers, you don't make money. And you can't engineer your way into hitting them.

Failure rates are structural, not incidental. Roughly 70% of angel investments return less than invested capital. That's the model, not a warning sign. You need a portfolio of 15-25+ companies just to have a reasonable shot at capturing one outlier. Most angel investors aren't that diversified.

Liquidity is nonexistent until it isn't. No cash distributions during the hold period. Returns are entirely back-ended, contingent on an exit that may take 7-10 years, or never come. AngelList data shows funds launched in 2021 had a median IRR of just 1.2% with cash distributions of less than 2% of invested capital by 2024. In years 1-5, your portfolio looks terrible on paper. You're funding companies burning cash, and you have nothing to show for it yet.

None of this means angel investing is bad. It means it's incomplete as a standalone strategy.

Acquiring a profitable small business is a fundamentally different risk/return profile. You're not betting on a company that might work. You're buying something that already does – existing customers, proven revenue, established operations.

The comparison isn't just theoretical. Permanent Equity (Brent Beshore's firm) has published a 29.1% cash-on-cash IRR across their SMB portfolio since 2015. That's realized returns, not paper markups.

And because you're buying with leverage – SBA (Small Business Administration) financing or seller financing – the math compounds faster than you might think. A $600K equity check into a $2M acquisition generating $200K+ in annual distributions starts returning capital immediately. By year 3-4, you've recouped your initial investment and everything after is pure upside.

About 40% of US small businesses are owned by Baby Boomers. An estimated $10 trillion in business assets will change hands over the next decade as 12+ million businesses need new owners. By 2030, every Boomer will be 65+.

Fewer than one-third of these owners have a succession plan. Many are motivated sellers who are willing to offer seller financing, flexible deal structures, and below-market multiples just to ensure their legacy continues. They built something. They want it to survive them.

Entry multiples reflect that reality. Quality SMBs in the $1-5M revenue range often trade at 3-5x SDE or EBITDA – a fraction of what comparable recurring revenue streams command in venture-backed or public markets.

Lower middle market private equity has consistently outperformed larger funds on both IRR and TVPI (Total Value to Paid-In capital). Cambridge Associates data shows US PE delivered a 15.05% net IRR over the 10 years to June 2024, with the lower middle market meaningfully above that average. The reason is simple: more deal flow, better entry multiples, less competition from institutional capital.

SBA financing tailwinds are adding fuel. Lower down payment requirements and expanded seller financing provisions are making acquisitions accessible to first-time buyers who would have been locked out a decade ago.

SMB.co recently partnered with Owners in Honor to create acquisition pathways specifically for veteran business owners. The demographic of first-time buyers is diversifying fast. More operators with supply chain management, team leadership, and operational discipline are entering the market. That means more competition for quality deals, but it also means the bar is rising. Sloppy financials and weak operations won't cut it when you're bidding against a former Marine Corps officer who ran logistics for a battalion.

The market is getting more sophisticated. Good news if you're a serious operator. Even better news if you are ready to co-invest with an experienced investor.

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I'm not saying stop angel investing. For investors with the risk appetite and portfolio size, venture exposure makes sense. The power law can produce life-changing returns.

What I'm saying is this: most HNW investors are overweight on venture and underweight on cash-flowing assets. Their entire alternative investment allocation is binary bets with no current income and no liquidity. That's not a portfolio – it's a lottery ticket.

The smarter allocation pairs them. Angel and venture on one side: high upside, high risk, no liquidity, plays out over a decade. Cash-flowing business investments on the other: moderate upside, lower risk, quarterly distributions, starts working immediately. The two are almost perfectly complementary. One is the swing-for-the-fences bet, the other the base layer of returns, income, and downside protection.

Think of it as a barbell. Venture on one end for asymmetric upside. Profitable SMBs on the other for steady compounding and income. Public equities in the middle for liquidity.

Most sophisticated investors already diversify across public equities, real estate, and venture. And the current macro environment – Silver Tsunami, favorable multiples, expanded SBA programs – makes this arguably the best entry point in a generation for SMBs to join a savvy investor’s portfolio.

Thanks for reading!

At Lynnfield, this is exactly what we do – and we're always looking for like-minded co-investors who want real exposure to this asset class. If you’re interested in exploring this space, reply to this email and let’s explore what we can do together.

Talk soon,
Param

P.S: In case you’re joining us late, you can check out the previous editions of this newsletter here.