Angel investing is one of the most appealing jobs in the market, especially with some of the startup success stories. Being an angel investor can be a rewarding, insightful experience. While angel investors can aspire for greatness, they should remember that great things require significant risks, and if you are not yet ready to take major risks, it is wise to take one step at a time. An Irish saying: “much done, more to do.” In the world of angel investing, there is always more to learn.
One of the first lessons any angel investor needs to learn is to spot hardworking people. Investors realize that no matter how brilliant a business idea is, the founders and their potential are more important in almost every situation. According to Chris Mairs CBE, Venture Partner at Entrepreneur First and prolific angel investor with more than 100 companies in his portfolio, the most important question he asks himself in a pitch meeting is if the CEO is exceptional enough. Another experienced angel investor, Simon Hulme, Program Director of MSc Entrepreneurship at UCL School of Management, also believes that “a great idea is simply useless in the wrong hands.” To recognize an exceptional founder, a diamond in the rough who could give you the next greatest exit you dearly desire, learn to spot talent.
Angel investing is all about experience and patience. Angels must understand the importance of patience, especially at the beginning of their journey. Do not rush into a deal even if you are excited about it. Start by investing small amounts and building your portfolio. Learn the business curves and look for startups with ideas that can withstand the test of time. By slowly investing in reliable startups with reliable people and funds, you could learn to recognize what a good deal looks like. Making a long-term investment could have greater benefits and returns for an angel, so it is important to remember your investment can’t profit overnight.
What makes a good angel investor is a diverse portfolio. In the world of business, an angel’s portfolio is like a report card. A desirable portfolio must be diverse enough to include a high-risk, potentially high-return asset class and include subsequent funding rounds. Successful business angels know that they should keep a good dynamic between different business ventures because thinking out of the box will increase their return. Diversity in investing does not necessarily mean diversity in different startups; it also refers to diversity in investment rounds. Hulme refers to his investment approach as the ‘stop loss’ policy. After gaining experience, he learned to invest in the first round modestly and only follow the investment plan if there are signs of promising progress.
Angels are usually presented with promising track records and resumes. A successful angel questions their numbers and does his research to ensure the startup team is not all talks and no action. Look for their past and assess their academic and professional lives to find the best entrepreneur and startup team. Startup investing is a high-risk job, and according to Harvard Business School’s new data, only 11% of angels manage successful returns on their investments.
According to Forbes, most startup investments take 7+ years for a major return. Some companies achieve this in a year or two, but some startups might take up to 15 years to grow enough for a sizable return. Simon Thorpe, the Managing Partner at Delta2020 and Chair at Cambridge Angels, advises new angels to: “think about a long timetable, it’s called patient capital for a reason. Don’t sell too early because your best ones, your oranges, take longer to ripen than your lemons. You’ve got to stick with the oranges.” On the same note, Jason Calacanis, one of the most successful angel investors in the world, recommends that investors identify and invest in “bridges.” He defines bridges as companies that can plan a long-term strategy and adapt to future situations.
Due to globalization, many investors have started to reach out to foreign countries for investment opportunities. Taking your investment abroad can be a rewarding plan, but it can also be very risky. Experienced angels recommend that new angels start by learning about their local environment, learning the market’s demands, assessing risk factors, and planning a market strategy. One key element in understanding your local market is effective communication with the startup teams you’re investing in. Startups can only succeed when their product has a loyal customer base. Starting your investment with local businesses would help you understand the customers’ demands and create a plan that would have a bigger success rate.
Angels are most commonly known as early-stage investors. Your responsibility as early-stage investors is to help shape the startup in any way you can, especially if the startup is still in the first round of investment. Angels typically have more experience than startup teams; therefore, you can offer your sincere help as friendly mentors. You can ask them if they need any help or suggest an alternative plan for their already existing one. Mentoring could also help you learn negotiation skills that will definitely help you in your future endeavors as well.