Angel investing has seen an uptick in participation in the last 20 years and remains a very real way for entrepreneurs to fund their startup business aspirations.
How to angel invest is important to assuring you’ve got the best chance of being successful with this type of investment. There are many great angel investment opportunities available if you know how to find them and how to evaluate them.
Think of what follows as a mini Angel Investing 101 course.
Before we dive into how to angel invest, let make sure we discuss the definition of an angel investor.
An angel investor is a high net worth person who will dedicate some of his or her wealth to fund entrepreneurs as they pursue a startup business in exchange for an ownership stake in the business.
An angel investor is typically an “accredited investor”, which is defined by the Security and Exchange Commission as someone with more than $1 million in net assets or having earned more than $200,000 each of the last two years. In other words, angel investing is typically limited to high net worth individuals.
Angel investing is attractive to entrepreneurs because it is sometimes difficult to raise money for startup ventures in other ways. For instance, it is very unlikely for a bank to loan money to a startup business before it has a longer track record of successful operations.
And the amount of ownership that a venture capital firm would require can be unattractive to the entrepreneur. As a result, entrepreneurs are sometime forced to look to angel investors to fund their startup.
Angel investing is attractive to the angel investor for many reasons.
Given that an angel investor is investing in a start of business means that this will be a risky investment. But while the risk is high with angel investing, the potential for profit can be enormous. Certain kinds of angel investors are looking for angel investing opportunities purely with a profit motive.
And while some angel investors are investing purely for the profit potential motive mentioned above some are doing it because they believe in the mission of the startup and want it to be successful.
The answer really depends on what kind of investor you are and the kind of risk you are willing to take with your investments.
If you are a conservative investor looking to protect your investment principal and make a small guaranteed return, then angel investing is absolutely not right for you.
If you are an aggressive investor willing to take risks with your investment capital in order to potential achieve significant returns on your investment, then angel investing could be right for you.
Because of the inherent risky nature of angel investing under no circumstance would I invest more than 5% to 10% of my investment capital in angel types of investment opportunities.
If you’ve consulted with your financial advisor and come to the conclusion that angel investing is right for you then there are a couple ways to get connected with investment opportunities.
First would be to ask your financial advisor about local financial firms that specialize in finding funding for startups. That would be the most direct method of getting looped into the deal flow for startup businesses that need angel investors. And you would likely be supporting your local area, which would be an added plus.
Or there are numerous national companies that are well known for matching startup companies with angel investors. Examples include Band of Angels (www.bandofangels.com) which has been around for 25 years and the FundersClub (www.fundersclub.com) to name just two.
Part of talking about how to angel invest includes discussing how to evaluate investment opportunities that may be presented to you if you decide to consider making an angel investment. You definitely need to do due diligence before you invest.
The most important consideration about a company when making an angel investment is the management team. Are they experienced and trustworthy? Have they previously done start up businesses that have been successful grown or have they never done this before? Or perhaps they did it before but in a way that ended badly with previous investors losing money.
Don’t be lured into making an angel investment with an inexperienced or less then trustworthy management team because it will most likely end badly.
Do the forecasts of the angel investment company look reasonable or unachievable? Since angel investing is centered around startup companies with little to no historical financial information, the most significant financial information available will be the forecasts of future performance.
Reviewing these for reasonableness will be key before you make an angel investment. Be sure to seek assistant from a CPA or financial advisor if you need help. And when in doubt, don’t invest!
The last consideration when evaluating angel investment opportunities is, what is the liquidity event down the road that will allow you to get your money out and how long is that expected to take.
Unlike publicly traded companies where you can sell your stock any day, these are private companies whose stocks are not liquid. As a result, understanding management’s plan for how the angel investors will get their money out is an important consideration.
Angel investing is a high risk, high reward strategy that is not right for most investors. But if you follow the guidance in this article it will enhance your chances of getting a higher return on any investment that you decide to make as an angel.