How to Be an Angel Investor
How to Be an Angel Investor
How to Be an Angel Investor
Angel investing used to be reserved for–as one article puts it–”friends, family and fools.” However, this is no longer the case as business-savvy investors seek to get in on the ground floor of startups and even organize themselves into angel investor funds. By investing in one of these funds, an angel investor may have the opportunity to invest a dozen startups with just over $100,000. This provides some diversification in an otherwise risky investment area. As private-assets have taken a beating in the recession, angel investors can expect to be able to purchase larger shares of small businesses with less capital.
It should be noted that angel investing is not a “get rich quick” type of scheme, these investments may remain illiquid for 5-12 years–including various economic cycles. It’s generally thought that the odds of long-term positive returns are best when a company starts up during a recovery period and gains traction before the next downturn in the market.
There is a chance for big returns as angel investor funds typically charge 1-2% and then an additional 10-20% of the company’s profits. Being an angel investor is similar to being a venture capitalist with many of these small-scale ventures ending in a flop but the gains from the occasional big success make it worthwhile for the angels. Unlike venture capitalists, angel investors provide seed money for the start up of the business and venture capitalists tend to fund the expansion and larger funding.
One benefit is that angel investors can usually exercise greater control over the business. Actually, businesses sometimes seek out angel investors exactly for that expertise that angel investors provide as board members and advisers. Often a good candidate to be an angel investor has a wealth of experience to offer in a specific area of investment. According to Time:
“The perfect candidate is a retired, successful entrepreneur who can provide valuable counsel,” says Christopher Starr, managing director of Innovation Philadelphia, a regional economic-development group that finds financing for entrepreneurs. A perfect set of 10 angel investors throwing in $100,000 each to reach the $1 million mark that many start-ups want would include one or two attorneys, accountants, consultants, bankers and industry executives, along with some silent investors, Starr says.
The high potential for failure keeps angel investors from investing exclusively in one company. A good precaution is to have a financial attorney knowledgable about private equity to write up the contracts. The lawyer should express exactly your role on the board, your rights and what you expect the entrepreneur to do so as to avoid any confusion later. One way to get involved in angel investing is to join an investor club that usually welcomes experienced investors, especially within a specific industry.