Angel investors invest their own funds in promising business ideas in exchange for an equity stake that can be cashed out when the company sells or goes public, yielding a return on investment for them.
However, angel investments often follow a power law distribution, with a few investments yielding high results. This makes achieving sufficient portfolio diversification more challenging.
1. Know What You Want
Before beginning your search, it is essential to consider whether an investor will hold an equity stake in your company. Angel investors may require active involvement when making decisions that affect its future; additionally they could expect a substantial return on their investments.
Locate companies you are interested in investing in and become familiar with their history and current state. Develop an elevator pitch for your company as well as an in-depth business plan; use professional networks or local business groups to find angel investors.
Engage other investors for coffee and learn from them about their process and the criteria they use when selecting startups they invest in. Gain from their experiences and take a peek at some of their investments!
2. Build Your Network
Angel investors rarely provide financing without doing their due diligence first, so be prepared for active discussions that could involve back-and-forth as well as an opportunity to present your startup business.
Carefully crafting an elevator pitch is key, balancing between being informative and concise while engaging potential investors.
Aspiring angels typically form relationships through professional connections or local events. You can even join syndicate deals, allowing you to co-invest with other angels to improve your deal flow and increase the odds of investment success – this is particularly effective when handling large investments that require valuable resources from multiple angels. Whatever method you use, be sure to keep a meticulous record of your investments!
3. Know Your Limits
If you want to invest in angel investing seriously, it is essential that you set and adhere to personal limits. Experts generally suggest keeping angel investments below 1% of net worth (excluding primary residence).
Angel investors usually specialize in one sector or industry and make decisions with that knowledge in mind, helping ensure they can add real value to companies in their portfolio.
Angel investors typically invest in groups of 3-10 deals at once to spread out their risks, provide support to entrepreneurs they’re supporting and simplify taxes and accounting. Group members should open separate bank accounts for business use within each group as well as consider purchasing General Liability Insurance that protects against claims from personal injuries, property damage and more.
4. Know the Process
Angel investors often expect to play an ongoing role in supporting startup ventures, offering mentoring or introductions to potential customers or partners as well as help securing additional funding down the line.
At an investment meeting, entrepreneurs typically present their business to angel investors via video conference or in person. After their presentation, members usually ask questions and determine their initial level of interest in investing.
Forming an angel investment group requires creating an entity such as a limited liability company to help pool capital more easily and reduce tax liabilities. Furthermore, this will enable you to set up a bank account and secure group insurance policies more easily.
5. Know Your Fees
Angel investors typically invest their own funds in early stage startups in exchange for equity stakes in return. They may also provide advice and expertise based on their network and experience.
As you consider potential investments, be sure to familiarize yourself with investment terms like valuation, ownership stake, liquidation preferences, anti-dilution provisions and returns calculations as well as any associated fees or costs.
Be patient! Angel investments often take years to pay off, so plan for them accordingly and set aside enough capital to cover their illiquidity.