So, you want to be an angel investor? Some of the initial questions that come to mind for people who are new to angel investing are whether angel investors make money and whether angel investing is worth it.
These questions are hard to answer since there have been plenty of examples where angel investors have made amazing returns on their initial investments. Every angel investor dreams of a unicorn business that immediately becomes a household name, but the reality is sometimes a little different. There have also been many times when the rate of return has been poor or non-existent for some early-stage companies. So, angel investors do not always make money. As with all investments, there is an element of risk involved.
So, the question, “is angel investing profitable” is a complex one to answer. One thing is clear for many individuals, angel investing has been very fruitful and has provided a return that has by far outperformed traditional investments.
The truth is that investing in a brand-new small business comes with both challenges and financial dangers, but this is something most angel investors approach with that high risk in mind. This raises the question of what the difference between successful angel investments and unsuccessful ones is, and whether there are strategies that angel investors can adopt that will reduce the potential risk of investing their own money into an enterprise.
Private investors who are looking to become angel investors can reduce the potential risk of investing in startup companies by following some key guidelines. Successful angel investing typically requires more than just investing in various businesses in a scattergun approach. Instead, investors need to make careful decisions and evaluate the business opportunities thoroughly.
Most successful angel investors put a lot of time, effort, and due diligence into the process of selecting the business owners that they are willing to work with.
One of the key skills that will benefit angel investors is the ability to evaluate the financial aspects of the startup in question. Angel investors will need to understand valuation metrics and be able to assess the growth potential of the business. Entrepreneurs may present a certain set of financial data to the angel investor, but it is important for the angel investor to be able to make an educated judgment call as to whether those financial figures are in order and make practical sense.
Many angel investors are entrepreneurs themselves and often have a background in a certain industry. While angel investors can invest in businesses in any marketplace, many like to focus on start-ups and new businesses that operate in familiar territories that match their own background and experience. This typically helps angel investors with two key characteristics the first having technical knowledge of a particular industry and the second, the ability to network and have existing connections within a market.
Regardless, angel investors will need to be able to carry out a market assessment of any potential investment. Some of the basic questions that will need to be answered are whether the business has a unique selling point, how it matches up to any competition and what size and potential that business has.
Some of the more successful angel investors will also have experience in team evaluation. They will be able to look at the core employees that are within the business and see what potential and skills each of these people bring to the organization. Often angel investors are not only investing in a business proposition, but they are also investing in the people behind the idea.
Another way an angel investor can decide whether a venture is successful or not is by carrying out a comprehensive founder evaluation. In short, understanding who they will be doing business with.
One important aspect is understanding the leadership capability of the founder. Is this the sort of person who can work well with a team, can manage other people, and has good people skills?
Not every business needs an experienced leader, but more often or not, having someone who doesn’t display these skills may be a flag for the potential success of the business.
What sort of industry knowledge or relevant experience does the founder or team bring to the organization? Sometimes individuals come into a marketplace and are ‘disruptors’, because they bring a unique and new idea or aspect to an established marketplace. In these cases, experience in the marketplace is less important, especially if the angel investor themselves brings that experience and connections. However, for angels looking to minimize the risk of their investments, finding an entrepreneur with a good track record and experience can be an important thing to look for.
Another aspect worth looking at when evaluating founders is their adaptability. For instance, have they had any prior failures, or have they had to pivot their business to adapt to changes in the market conditions? One point of failure for many businesses is when a founder continues on with an idea or direction when all the evidence points to them needing to adjust. Leaders who have a myopic view of their business can sometimes fail to adjust course before it is too late. An adaptable founder is one who can keep an early-stage startup going even when presented with challenges.
When evaluating a founder or business partner another important thing to understand is what is their commitment level to the business. Will they be full-time, or do they have other business commitments that they will need to address? Many entrepreneurs have multiple businesses but sometimes an individual can be spread too thin. Will they have time to make the business successful and how much skin in the game do they have?
A similar question can be posed about how much financial investment and private equity the entrepreneur has put into the business that they are looking to launch or grow. If they have not invested any of their own personal wealth into the project and instead are looking to find investment for 100% of the running costs, are they truly dedicated to the business? Founders who have invested both their time and money into a start-up tend to be much more committed to its success.
Often, the biggest barrier for brand-new entrepreneurs is financial liquidity to make the business successful, since traditional funding methods such as business loans are normally unavailable. VC firms are also unlikely to be interested in brand-new startups. This is where angel investors can fill the gap. With this in mind, a lack of personal financial investment into a business idea is not always a red flag that should be avoided, but instead something to be aware of.
Another question that angel investors should look to answer is whether the entrepreneur has good references from colleagues or business partners that they have worked with in the past. This can help justify the working style and reliability of the entrepreneur. Even exploring the entrepreneur’s LinkedIn profile can provide valuable insight into the individual that they are looking to form a partnership with and can be a part of the decision-making process.
It’s important for individuals to understand how angel investing may fit into the broader financial objects that a person has. Often, angel investing plays a part in a multifaceted approach to investing that might combine different types of investments alongside angel investing. Successful investors typically spread out their risk across different asset classes. In this way, the average return over time may be lower, but the risk is also reduced.
Wealthy individuals and high-net-worth individuals often look to invest in more than one project at a time and this means that they will tend to invest smaller amounts into projects to again limit their exposure to any downsides to angel funding. One of the barriers for Angel Investors is deal flow generation, and this is where the Angel Investment Network can help. We connect investors with entrepreneurs located all over the world through our platform.
Angel investors who are looking to mitigate their risks may also consider forming an angel group or syndicate, that is formed with a number of like-minded individuals. This can be a good idea since risks are reduced but so are the potential profits.
Successful angels may also be entrepreneurs themselves and can have vast experience in the industry or marketplace that they are looking to invest in. With that in mind, angel investors who offer mentorship, advice, and access to their own business contacts can help improve the chances of the success of any business they choose to invest in.
Successful angel investors hold regular meetings with the entrepreneurs running the businesses that they invest in. Keeping up to date on the performance of the business is vitally important to protect an investment.
Angel Investments are illiquid investment opportunities, which means that the money that is used for the investment is often tied up in the business for a long time. This can be many years. Angel investors will need to keep that in mind when they are making investments. In addition, setting goals and targets for the business is also important, and deciding if there will just be one funding round or whether the business will need additional injections of capital.
Angel investors also need to set a goal and understand where their exit point is from the business. For instance, whilst many angel investors will acquire some form of equity stake in a business the investment may not be fully realized until much later on, perhaps even at the IPO stage. This is typically where angel investors will step out of the business. Past this point for these kinds of public companies, venture capitalists tend to take over the investment side of things since they have access to much bigger investment stakes.
While any investment comes with risk, especially early stage investments such as angel investing or venture capital investment. However, angel investing can offer a remarkable potential return on investment. Investors who combine thorough due diligence, and research into the startup’s business plan, and the entrepreneur behind the project, are likely to have significantly better outcomes than those investors who do not.
Angel investors looking for startup businesses to fund can sign up to the Angel Investment Network to begin their search. Entrepreneurs looking for fundraising can leverage our network to present their ideas, projects, and business plans to individual investors.
You can also check out the Learn section to gain more knowledge about investing and fundraising.
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