12.10.2012

The Complex World of Angel Investing

I’ve written quite a bit about funding from an entrepreneur’s perspective, mainly focusing on what the various sources are and how best to think about approaching them. On the opposite side however there are a number of things to consider if you are the one providing the funding.

Over the years, the concept of angel investing has become increasingly popular, particularly as the number of wealthy 20-somethings has steadily risen. Their success and optimism put them in a unique position in terms of their willingness and enthusiasm to invest in start-ups.

With this eagerness however comes a tendency to neglect what is required of a successful investment: thought, due diligence and the right amount of instinct. There is a rush to become the next Google or Facebook. Unfortunately, it’s not that simple. Much of the literature on angel investing suggests that of all the business ideas that angel investors are presented with, only 5% will be successful. Now success in this context does not just refer to an ability to make profit. Success in this context also refers to the ability of the investment to generate some return to the investor (in addition to meeting all its normal goals such as profit).

There is no clear cut path to choosing a successful investment, but there are a few things you should make sure are in place:

Does the company have a business plan? Have they rigorously tested the financial viability of their ideas?

- What kind of team does this company have and how invested are they in what they’re doing?

- Is there an exit strategy? For the most part your financial commitment to the company will not be a permanent one. You need a way to get your money (and some returns) back. How exactly will this happen?

- What stage are you investing at? Have you considered the appropriate level of risk?

- What have you done to minimize your level of risk?

- How much of the risk have the entrepreneurs taken on through their own personal investment in the business?

Have you had experience as an angel investor? Please share it with us!


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