Table of Contents
Defining Angel Investors ……7
How Long Before My Investment Pays Off? ……..8
Plan Your Exit Beforehand .8
Smart First Step – Join an Angel Group ….9
You Borrow Knowledge …10
You Get Instant Access to Better Deals, and More of Them as Well …..11
You Enjoy Better Returns 11
Your Investing Knowledge Grows .12
You Have Fun and Socialize …….12
How (and Why) to Become Accredited …..13
How to Find Companies Who Need Money .15
What to Reasonably Expect in Return ……16
The 10% Rule You Should Use with Any Investment 18
The 12 Company Rule Successful Angels Live By …20
Develop a Personal Investing Guide 22
Top 10 Tips on Angel Investing ……25
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They freely lend their expertise and knowledge to the company they are backing, and this works well for both parties. One reason angel investors prefer this type of relationship is because they get more control over their investment rather than purchasing stock. In return for their investment, they receive a percentage of the company, and the contract usually includes partial access to the company and its key team members, and sometimes even a seat on the board of directors.
If you have some investment capital set aside and want a chance at outperforming the stock market, while also possibly achieving a 5X or 10X or 20X return on your investment, you may be considering becoming an angel to some company that will certainly think of you in angelic terms when you give them the capital they need.
If so, this guide contains everything you need to know.
First, we will define what exactly is meant by the term angel investor. There are similarities to equity crowdfunding and venture capital, and significant differences as well. You will discover the reasons for joining an angel investment group, and why it is absolutely essential to plan your exit before you sign on the dotted line.
You will find out where you should go to find companies who need your money, and what you should reasonably expect in return. It is reasonable to hope for a profitable investment, and there are non-monetary expectations which should be met as well. Additionally, we will introduce you to the 10% rule and 12 company tip successful angels use to minimize risk while still exposing them to potentially huge returns.
Let’s get started by taking a closer look at what the term angel investor means, so you can decide whether or not you want to journey down this investment path.
Defining Angel Investors
The American Angel is the name of a report conducted on angels and the companies they invest in. The report shows that angels in the United States invest approximately $25 billion in 71,000 startups each year. The average angel will invest between $10,000 and $50,000, and 62% are between 51 and 70 years of age.
It seems that female angels are 10 times more concerned about the gender of the company founder than male angels, and twice as likely to consider the social impact of the company they are choosing to invest in. Angels are more likely to write larger checks, take the role as the lead investor, and even accept a position in management or on a board of directors if they have entrepreneurial experience similar to the company’s industry or market.
That puts a face on angel investors. Now let’s pin down a definition. “An angel investor is an individual that invests assets or money into a small business during startup or at an early stage in that company’s development. In exchange, the investor receives a percentage of ownership in the company.”
This is similar to venture capital funding but very different for a couple of reasons. First off, as mentioned earlier, venture capital companies don’t like to get involved unless a company is in need of at least $1 million, and usually several million dollars. Secondly, VC investments are exclusively made in established companies. Also, VC capital is often not granted unless a seat on the company’s board of directors is provided.
VC funding rests at the top of the financial scale for equity fund investments. At the lower end are family members and friends. Generally speaking, friends and family will not usually have the type of money needed by most small businesses to launch or to expand. Since VC companies don’t want to get supply the $10,000 to $50,000 typical of an angel investment, this is the sweet spot for angels.
How Long Before My Investment Pays Off?
The average angel investment returns little to no money. For those investments which fail to return cash flow, an exit is sometimes never realized. You back a company and the company either goes under completely or stays in business while you never realize a return on your investment. In situations where an exit is achieved, research reveals the average angel investment lasts from 3 to 5 years.
Wise investors like to see their money appreciate, but they are also smart about when to exit an investment so that they can realize a profit that is not just on paper. This means when they see their hard-earned money make them more money, they understand that can change. They either sell their position in the company to other investors or to the company itself.
Many angels have 3 to 5-year windows where they are comfortable with tying up money in an investment. After that time, they are willing to get out of an unfavorable position or cash in for a profitable return. In other words, much of the reason for the 3 to 5-year lifespan of the typical angel investment is because the investor had planned to get out of the position in that timeframe. This is known as planning your exit.
Plan Your Exit Beforehand
They say that you make money on a home when it is purchased, not when you sell it. If you do your research and know the market, you can identify a good bargain on a home that is almost guaranteed to return a profit when you sell it years later. While there are no guarantees when you invest your money, it is wise to plan your exit before you provide the capital a company needs.
In investing circles, an exit strategy is simply a plan to get out of a specific investment. This happens before you invest your money, not after you are already involved. Ideally, your exit strategy will accompany a profitable return. However, you should also have an exit strategy planned if your investment disappears entirely, or delivers just a small return. Incidentally, you can’t plan for the company you are backing to be bought out by another firm. However, this is usually the most ideal situation for an angel. Additionally, you can hope that the company eventually issues an IPO (initial public offering) of their stock. This almost always delivers a significant return to an angel. Any time you invest your money, you should have some timeframe in mind for realization of a return, or for getting out of a bad investment.
This means doing lots of market research and talking very closely with the founder and management team of a company. You can use the accumulated knowledge to not only decide whether the investment looks favorable or not, but also to set a timeline for your exit. Doing everything you possibly can to create a favorable exit may be affected by whether you decide to invest money on your own, or with a group.
Smart First Step – Join an Angel Group
There are more angel investment groups in the United States now than ever before. That is a sign of the times. Seemingly everyone knows somebody who is starting a company or thinking about starting a company. Additionally, the small business landscape in the United States and elsewhere is booming. This means there are more businesses that have been around for a few months or a year that need funding to grow and expand.
This preponderance of companies that need small but substantial amounts of capital is one of the reasons why angel investment groups have become so numerous in recent years. Another reason has to do with the age of the typical angel. Baby boomers in America are now retiring, or have been retired for some time. The US is experiencing “the graying of America.” There are more seniors than ever before in the United States.
These people have money to invest, but not all of them have money to burn. They are looking for guidance. They appreciate the stock market is a safe place to invest money over time. However, they would like to try for a more substantial return. They don’t mind risking a few thousand dollars of expendable capital if the possible reward could be substantial. These people turn to the internet for guidance, and angel investment groups are there with the answers. For a lot of reasons, it makes sense for those people new to angel investing to join a group of experienced angels before they whip out their wallets and start investing.
Marianne Hudson is a seasoned investor and a regular contributor to Forbes magazine. In a recent article she wrote for Forbes, she mentioned that she recommends every angel wannabe to join a local angel group as a necessary first step in the education process. Here are a few of the reasons why.Other Details
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