Being an angel investor takes a rare combination of commitment, tenacity and motivation. Unlike venture capitalists, angel investors use their own money to provide early or “seed” stage financing for start-up companies. Their investment typically fills the gap between a company’s venture capital and its debt finance, and they bear substantially more risk than their venture cap counterparts. Subsequently, they earn a higher return on their investments.
An angel investor can sometimes take a hands-on approach with his investments, contributing his relevant experience to various aspects of the venture. For this very reason, angels generally put their money into fields they know most about.
It can be a costly business. To get started, one typically needs $5,000 to $500,000, and depending on the situation, later-stage investments may be necessary. As a result, angels don’t plan on losing money, but they do remain prepared for that event.
Get connected
There are at least three ways to connect with other angels and better understand what might best be described as the angel investor’s craft.1- Partner up
While not always possible, some angel networks can put you into contact with a more experienced angel whose investing interests match yours and who can serve as a mentor.
2- Join an angel group
Since angels started gathering into small groups in the late 1980s, their popularity has exploded across local, regional and national levels. They provide each investor with a number of key benefits, all of which work toward reducing inherent risk. The wider profile provides access to more -- and higher quality -- investment opportunities; those opportunities allow for far better investment diversification; the risk factor is further reduced by a broader base of business experience among group members.
Examples of the diverse angel groups in operation include Northern California-based Tenex Medical, Inc., which focuses on funding entrepreneurs in life sciences, the Minority Angel Investment Network (MAIN) in Pennsylvania, which funds minority-owned or -led companies, and on the national level, Irish Angels, which is composed largely of Notre Dame alumni.
3- Join an angel organization
Memberships in organizations -- such as the Angel Capital Association (ACA) in the U.S. and the National Angel Organization (NAO) in Canada -- provide a wealth of information, services and contacts for angels of all levels of experience.
Practice due diligence
Many angel investors use the five elements listed below to assess an investment opportunity. Ultimately you are trying to set a company’s strengths and weaknesses against the overall risk. The general belief is that delinquency in only one or two of these areas can spell doom for the business; the key is to pinpoint those delinquencies and ascertain whether or not these can be corrected -- all before committing any capital.You will negotiate the amount of time given to due diligence with the entrepreneur, and it is recommended you take at least 30 days. Be extremely wary of equivocal reactions or noticeable resistance to due diligence, especially if it’s coming from the principals.
1- Technology
How will the technology perform against the existing market? You want to see a perceptible demand for the product, how it has performed in a wide range of tests, and what separates it from the competition.
The technology should already be legally protected by patents. Take this element a step further and look into the employment background of the management; you want to eliminate the chance that they engineered any aspect of this technology while employed elsewhere.
Most importantly, ask yourself how well you understand this product as well as the field. Maintain high standards for yourself here: You should have a clear, deep understanding of as many aspects as possible. If this isn’t the case, consider having an outside party assess it. Otherwise, your wisest move may be to walk away from the venture altogether.
2- Human resources
Begin by getting to know the management team as best you can -- more than anyone else, and more than anything beyond your control, these people carry your investment.
Look into their past achievements and survey their reputations among colleagues. Although reputations are not the be-all and end-all, you would like to know beforehand if, for instance, one of the principals is notorious for sliding from flop to flop while still landing capital.
3- Finance
What is the true value of your investment? This is no time to try to convince yourself of an investment’s potential; ground yourself with unsentimental predictions and assumptions. Since financial statements can only take you so far, try to make that determination with one of three approaches: income, market or asset.
Income: By applying methods such as net present value, equity cash flow or adjusted cash flow, approximate how much removable cash flow the company could sustain without compromising its operations.
Market: Approximates the company’s value by measuring it against similar, but publicly traded, companies. This method is often used as a way to double-check results from the income approach.
Asset: Approximates its value as an applicable financial option (ie, a call or put).
4- Legal
A quick way to evaluate the level of seriousness and professionalism among a venture’s principals is to inquire into whether or not they have their legal ducks in a row. Having all or much of the proper documentation in place, such as incorporation documents and a shareholders agreement, bodes well for your investment.
5- Marketing
This is about what kind of business plan is in place and who is leading the charge to execute it. A brief investigation into that person’s marketing background should ideally reveal some depth of experience in the same or similar industry as the venture at hand.
Tailor your portfolio
Due not only to the high risk but to the amount of time between making an investment and seeing a return, it’s considered foolish to sink a large portion of one’s portfolio into any angel venture. In fact, most financial advisers recommend committing no more than 10% of your total portfolio to these investments.Structure returns
Although each venture will be negotiated separately, consider how you’d like to achieve a return from your investment in the event there is one. Options range from dividends and capital to fees and private equity (if available). Additionally, some angel investors charge a monthly retainer.Seek professional assistance
The importance of assessing deals or agreements as well as the supporting documentation can not be overstressed. For that reason, it’s crucial to obtain some experienced legal help.You’ll also benefit from the unbiased eye of an accountant, who can perform a range of valuable services from offering tax advice to evaluating the soundness of various business plans.
Practice patience
All forms of investment require some patience, but since it takes substantially longer to see a return as an angel investor, it also requires more patience. Meanwhile, the greater personal involvement will eat up more of your time.In addition, keep in mind that people new to this type of investing are often surprised, sometimes frustrated, and occasionally discouraged, by just how long it can take to find the right company or venture.
becoming an angel
Compared to the traditional investor, angels are manifestly more involved with their investments. While the broader scope of that notion might have wide appeal, the stark realities of being an angel -- the considerable risk, the amount of time and work required -- help to cut down on that appeal and weed out the unsuitable.What remains is the boldest investors -- angels who stalk the kind of shaky financial ground lesser investors fear to tread.
Resources:
http://en.wikipedia.org/wiki/Angel_investor
http://www.tenxmedical.com/
http://www.main-usa.com/about.htm
http://www.business.nd.edu/IA
http://www.angelcapitalassociation.org/dir_about/overview.aspx
http://www.angelinvestor.ca/m_4.asp
http://www.angelscorner.com/
http://www.irun.com/users/7493/downloads/TheAngelPrimer_04.pdf
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