Angel investing is increasingly popular, but it’s not for everyone. Angel investing presents great risks and great rewards, not all of which are financial. However, it takes more work than what a casual investor may be prepared to undertake. Find out what it means to be an angel investor before making any commitments to see if it’s right for you.
Is Angel Investing Profitable?
Angel investing has the potential to provide greater returns than more traditional or passive types of investing. However, the overall percentage of successful angel investments is low, (1 in 10) – but when they hit, they hit big. Here are a few factors that mitigating risk, increasing your win rate – and a making great return depends on:
Research: By compiling thorough research on the investments you are considering, you can accurately gauge which ventures have the most promise for growth. Jumping into a venture blind increases the risk of choosing a business likely to fail.
Strong Business Contracts: When signing on as an investor, negotiating good terms is important, if the company flourishes, you will to. Anti-dilution and other “preferred” terms can assist with this.
Angel Investment Groups: If you are new to angel investing, finding an angel investment group will give you a community in which to discuss the various ventures. Experienced angel investors groups act as a team to identify deals, conduct due diligence, and negotiate good terms – and if the group invests as a fund, you are spreading your risk across 20 or more companies.
Advantages & Disadvantages of Angel Investing
As with any business deal, angel investing has the potential to succeed or fail. Sometimes, seemingly brilliant business plans do not catch on, while the less obvious ones thrive. Here are the pros and cons of choosing angel investing:
Pros to Angel Investing
Despite the higher risk, angel investing is a growing practice. This is likely attributed to the fact that when angel investing succeeds, investors can reap rewards far greater than other forms of investing. Pros include:
- High potential financial reward – most angels aim for 20x + returns
- Variety of businesses to invest in – find something you know well and that’s of interest
- Extensive networking opportunities – mentoring founders and with fellow angels
Cons of Angel Investing
Angel investing comes with risks. When investing in a startup, the risk is naturally high – as it is with any new business, which may be exacerbated if the founder is inexperienced. Cons include:
- High chance of a startup failing
- Finding good startups and conducting due diligence requires lots of effort
Is Angel Investing Right for Me?
Angel investing is not right for everyone, but if the following goals apply to you, then this may be an opportunity to consider.
#1. You Want Financial Returns
One of the primary motivations for becoming an angel investor is financial. In fact, angel investing can be very lucrative. If you pick companies well, conduct sufficient due diligence, and put together good term sheets, chances are that you’re going to have a good return.
#2. You Are Qualified & Have Money to Invest
Most angel investors are accredited investors – meaning that they have a net worth of $1 million or more outside of their primary residence or earn at least $200,000 a year as an individual or $300,000 as a couple. Also, angel investors are focused on making smaller investments at an earlier stage in a company. Typical investments range between $50,000 and $500,000.
#3. You Want to Have an Impact on Your Community
Most angel investors invest close to home where they can see the impact and stay in close touch with their companies’ activities. Angel investors decide on what companies and in which founders they want to invest, making it easier to do well while doing good. Angels who stay involved report quality of life benefits that go well beyond a solid return on their money.
#4. You Can Handle & Manage Risk
The biggest risk of angel investing is that you’re investing in early stage companies – with a high failure rate. However, there are steps you can take to mitigate risk. One key way to do this is through proper training. If you’re looking to get into angel investing, you should seek out training on subjects such as valuation, term sheet terminology, product-market fit, market sizing, business model, founder vetting, performing due diligence, and more.
Angel investments are known to be high-risk ventures, but if you can tolerate the uncertainties, and are willing to do the work, then investing in a startup can build your investment portfolio. The more research you complete prior to making any investment decisions will only benefit you later on as you hone your investment methods.
The goodness that comes out of investing
effects the entire region.
In our case, it effects the entire state.