Tips for aspiring angel investors
Are you considering becoming an angel investor?
An angel investor is typically a high net worth individual who invests in startups or small businesses in exchange for ownership equity or convertible debt. If done right, angel investing is a very rewarding experience. Angel investors have become an important part of the startup space. They invest capital and guide businesses in their early stages which helps prepare them for success. Angel investors usually invest at a relatively high risk phase of the business when venture capitalists or other risk-averse investors are not willing to invest.
An Angel Investor is also referred to as private investor, informal investor, business angel, angel funder, or seed investor. Anyone can become an angel investor given they have enough capital to invest, but commonly angel investors include professionals like lawyers and doctors, corporate professionals, or entrepreneurs who want to support a particular industry.
Despite being considered a high-risk investment, successful angel investments can generate very high returns on investment. However, most angel investors are driven by more than money. They might have a passion about a particular industry or wish to mentor the next generation of entrepreneurs in addition to creating a legacy for themselves and their families.
Whatever your motive for angel investing is, we’ve compiled some of the best tips that can help inform your journey into an early stage investing career.
- Do not put all your eggs in one basket
To begin your angel investing journey you have to be clear about how much you are willing to invest. Angel investing is different from investing in stocks and bonds because there is a very real chance that you could lose your entire investment. So we recommended you only choose an amount that feels safe to part with. Once you’ve decided on the amount, it is advisable to split your capital and invest it in several businesses. This will disperse the risk and increase the chances of success.
- Define your boundaries at the start
A lack of properly defined boundaries between investors and startups causes unnecessary conflict and stress. So it’s important that you define the limits and boundaries of your relationship with the entrepreneurs at the very beginning. Your relationship with the company will be based on your strengths and needs, whether you wish to have regular check-ins or give feedback in specific situations. It’s advisable to find a balance between micromanaging and staying distant.
- Invest with others
For early investors it can be helpful to work with other experienced investors. Investing on your own can increase your risk because of biases and being the sole financier. Investing in a group can also bring in valuable experience that helps with evaluating the deals.
- Think long term
One trait that every angel investor must have or learn is patience. Angel investing does not provide immediate returns. If you’re just starting it’s important to shift your thinking accordingly. You will have to think from a 5 to 10 year perspective. Therefore it’s important that you only invest the money you don’t need any time soon.
- Be prepared and be humble
Angel investing is risky and sometimes despite your best efforts things can go wrong. So be prepared to take risks, allow yourself to make mistakes, and be open to learning from them. The experience will teach you many things that will polish your investment skills.
- Invest in people
As an angel investor investing at the early business stage you’re actually investing in the founders not their products. Most of the time the products go through many changes over time and continue to evolve. It’s important that the founders have the passion and skills to take the company forward. The company team and talent make for the most important deciding factor for investing in startups. So it’s wise to get to know the founders, look at their experience, skills, and drive.
- Carry out due diligence
This is one of the most important steps in your investment journey. The more time you spend on due diligence the better your chances of successful investments. As part of your due diligence process make sure you evaluate the business model and cash flow strategy of the company. Assess their profit projections and expenditures. Moreover, examine the market, competition, and product fit for the target audience.
- Invest in what you know
When you’re just starting out, it’s better to invest in what you’re familiar with. With time you can learn more and diversify your portfolio. Sticking to a business that you understand and have some experience with can help you make smarter choices and avoid the mistakes you would otherwise make if you were to venture into unknown investment territory.
- Maintain percentage ownership
To be successful as an angel investor make sure you keep an eye on the deals that are doing well. Keep a certain amount reserved for investing your pro rata in the next round of funding so you can maintain your percentage ownership in the business.
- Make smart investments
Many angel investors make the mistake of focusing on just money. Know that you can offer more than just capital. You can help the company progress faster by sharing your knowledge, advice, and time. Experienced professionals are skilled at organization, time management, and know industry practices etc. By sharing these you can help the company do better than if you were to invest money alone. Moreover, your professional connections could also help the entrepreneurs.
- Be direct
Becoming an angel investor means that you’ll have to sit through dozens of pitches and sift through many potential opportunities to select your ideal deals. This means that you have to learn how to be direct and clear. Do not linger if you’re not certain about a deal. Be open and upfront. Don’t say maybe if you mean no. Be clear about your own investment interests and let that guide your decisions.
- Have non-financial goals
It’s important for angel investors to be clear on how they wish to impact society and make a difference beyond the financial returns. As it takes a long time to get your expected returns it is good to have other priorities for example, supporting a category of entrepreneurs or a certain industry and helping solve a problem you’re passionate about. Your investment contributes to creating the world you want to see.
